More Central Bank Policy Rates Get Raised 10-Year Sovereign Debt Yields Drop
February 2, 2023
Officials at the European Central Bank and Bank of England raised their policy interest rate by 50 basis points to their highest levels since 2008. The size of those increases matched expectations. The policy rates of the Hong Kong and Macao Monetary Authorities matched the Fed’s 25-basis point increase. Brazil’s Selic interest rate was kept steady at 13.75%, a level reached last August and well above the current 5.8% on-year CPI inflation rate.
Ten-year sovereign debt yields are down today by 25 basis points in Italy, 20 bps in the U.K. and Spain, 17 bps in France, 16 bps in Germany and 8 basis points in the United States. These declines reflect an investor move into riskier assets that has lifted share prices by 1.1% in Taiwan, 0.8% in South Korea, 1.6% in Germany, 1.9% in Spain, 1.3% in Italy, 0.9% in Great Britain, 0.4% in Indonesia and India and 0.2% in Japan. U.S. stock futures just before the open ranged from an uptick of 0.1% in the lagging DOW to rises of 0.9% in the SPX and 2.0% in the Nasdaq.
The mixed dollar has appreciated 0.5% against sterling and 0.1% versus the euro but also shows losses from Wednesday’s close of 0.6% against the Mexican peso, 0.4% relative to the Japanese yen and 0.3% vis-a-vis the Chinese yuan and New Zealand dollar. The Swiss franc, Canadian dollar and Australian dollar are steady.
WTI oil has slipped 0.5% following yesterday’s recommendation by OPEC+ to leave oil production quotas unchanged. Prices for Bitcoin and gold are up 0.7% and 0.2%.
The Bank of England‘s 50-basis point base rate hike to 4.0% was not supported unanimously. Monetary Policy Committee members Tenreyro and Dhingra voted to leave the rate unchanged in a 7-2 decision, citing a recession already underway that is likely to soften labor market conditions in light of the lagged impact of earlier monetary restraint that has not yet been felt. The majority view of their seven committee colleagues observed that regular pay growth, service sector prices, and overall CPI inflation (10.5% as of December) had not slowed by this point as much as assumed earlier. They expect Britain’s recession to be less pronounced than thought earlier, consider inflation risks to be skewed to the upside, and wish to counter the danger of rising expected inflation. The initial base rate 15-basis point hike from a pandemic low of 0.10% was made in December 2021. Of the eight hikes in 2022, one was by 75 bps in November, four were 50-bp moves (like today’s), and the first three were each of 25 basis points. Regarding future policy rate changes, officials now anticipate another 50 basis points of increase by the middle of this year and think the rate is unlikely to be lower than 3.25% as far out as early 2026. Rate hikes at every scheduled meeting going forward is not a foregone conclusion.
The European Central Bank was late to join the rate hiking party. The refinancing rate rate was at zero percent as recently as mid-2022, but officials made up for lost time in the second half of the year, enacting 250 basis points of increase in four incremental moves. Today’s 50-basis point hike to 3.0% matched analyst expectations, and it is to be flankd by a 2.50% deposit rate and 3.25% for the marginal lending facility rate. A released statement telegraphs the intention “to to raise interest rates by another 50 basis points at its next monetary policy meeting in March and it will then evaluate the subsequent path of its monetary policy.” This opens the door to a pause at later meetings that will be decided by incoming data then available and the need to see progress on the dual goals of dampening demand and anchoring long-term inflation expectations. As indicated earlier, officials are also embarking on balance sheet reduction, trimming the APP portfolio at a pace of EUR 15 billion per month starting in March. The pace of that drawdown after midyear will be decided at a later time.
Interest rate policy in Hong Kong and Macao is subordinated to fixed exchange rate policies. The Hong Kong dollar is pegged to the U.S. currency at 7.80 per USD, and Macao in turn pegs its currency to the Hong Kong dollar. These arrangements effectively lock those countries’ interest rates into moving in lock-step with changes in the federal funds target. After the Federal Reserve hiked by 25 basis points on Wednesday, it was a matter of short time before Hong Kong and Macao’s base rates were lifted in kind to 5.0% in each case.
During the first year of the pandemic, the Bank of Brazil‘s Selic rate was lowered from 4.5% to 2.0% between February and December that year. Brazilian rate tightening began in March of 2021, reaching 9.25% by the end of that year and the current 13.75% by last August. Four subsequent meetings have come and gone without further change. Yesterday’s statement assumes that Brazil’s new government will implement a more expansionary fiscal policy and prepares the public to expect an even longer period before rates can be lowered: “The current scenario, particularly uncertain on the fiscal side and with inflation expectations drifting away from the inflation target on longer horizons, requires further attention when evaluating risks. The Committee judges that this scenario raises the cost of the disinflation that is needed to reach the targets established by the National Monetary Council.” Brazilian CPI inflation had been in double-digit territory for 11 months ending last July. Although down to 5.8%, officials perceive both upside and downside risks going forward.
Germany’s trade surplus narrowed sharply to EUR 79.7 billion last year from EUR 175.3 billion in 2021 as the rise in energy costs powered a 24.3% increase in all imports. In December, however, on-year export growth of 5.9% surpassed the 3.2% rise of imports, and the EUR 9.2 billion average monthly trade surplus last quarter was wider than those in each of 2022’s first three quarters.
Turkey’s $14.3 billion trade deficit in January 2023 was wider than the $10.3 billion in the year-earlier month.
Swiss consumer confidence improved to a 3-quarter high this quarter, but the reading of -30.2 remained considerably weaker than the long-term average score of minus six.
Singapore’s manufacturing purchasing managers index edged up 0.1 point to a 2-month high of 49.8 in January.
South Korean consumer price inflation edged 0.2 percentage points higher in January to a 3-month high of 5.2%.
Romanian CPI inflation narrowed to a 13-month low of 32.8% in December, having crested at 53.0% last August.
U.S. labor productivity jumped by a greater-than-forecast 3.0% last quarter, the most in a year but still recorded a 1.5% slide compared to productivity in 4Q 2021. After advancing 4.4% in 2020 and 2.4% in 2021, productivity fell 1.3% on average last year. The four-quarter rise in unit labor costs slowed from 7.0% in the second quarter of 2022 to 5.2% in 3Q and 4.5% last quarter. In year-average terms, unit labor cost inflation more than doubled from 2.4% in 2021 to 5.7% in 2022. Fewer-than-forecast U.S. new jobless insurance claims last week (183k after 186k in the prior week) was another reminder of just how resiliently tight the labor market remains.
Canadian and New Zealand housing permits in in December respectively fell on month by 7.3% and 7.2%.
Copyright 2023, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Bank of Brazil, Bank of England, European Central Bank, U.S. labor productivity and unit labor costs
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