Reacting to FOMC Minutes and Awaiting More U.S. Data Reports

February 23, 2023

FOMC minutes published Wednesday afternoon confirmed that some policymakers at the Fed leaned toward a 50-basis point hike rather than the 25-bp increase agreed upon. Consideration of a pause in tightening was off the table, and there was widespread consent that more rate hikes will be necessary.

Investors now await revised 4Q U.S. GDP figures, weekly jobless insurance claims – each due within the hour – and U.S. personal income, spending, and PCE price deflator due tomorrow. There have been several inflation reports today from other countries and announced decisions by Turkey’s central bank to cut rates and by the Bank of Korea to pause tightening after a series of rate hikes stretching back to July.

U.S. stock futures are in the black after dropping very sharply earlier this week. Japan’s stock exchange was closed for the Emperor’s Birthday holiday; in other Pacific Rim stock markets, share prices advanced 1.3% in Taiwan and 0.8% in New Zealand but fell 1.1% in Singapore, 0.4% in Hong Kong and Australia, 0.2% in India and 0.1% in China.

Ten-year sovereign debt yields are up five basis points in the U.K., three bps in the U.S. and two bps in Germany.

The dollar has risen 01% against the yen, Swiss franc and yuan, is unchanged relative to sterling, and has fallen 0.4% versus the Aussie dollar, 0.3% against the kiwi, 0.2% vis-a-vis the loonie, and 0.1% relative to the euro after getting as high as $1.0585 at its 7-week low overnight.

A sharp slide in oil prices right after the Federal Reserve released minutes of its last meeting yesterday afternoon has been partly reversed. Prices for Bitcoin tokens and gold are down 1.1% and 0.4% today so far.

Consumer price inflation in the euro area in January has been revised upward by 0.1 percentage point to an 8-month low of 8.6%. Core inflation of 5.3% was a record high. On-year energy price inflation slowed to 18.9% from 25.5%, but food price inflation accelerated to 14.1% from 13.8%. Non-energy industrial goods price inflation rose 0.3 percentage points to 6.7%, and service sector price inflation stayed put at 4.4%. Inflation last month among the largest economies using the euro ranged from 5.9% in Spain to 7.0% in France, 8.4% in the Netherlands, 9.2% in Germany and 10.7% in Italy.

CPI inflation in Singapore ticked up 0.1 percentage point to a 2-month high of 6.6% last month but included a 170-month high core inflation rate of 5.5%.

South Korean producer price inflation of 5.1% last month (a 22-month low) was down from 5.8% in December and 10.0% last June.

Aside from a spike to 4.4% last September, CPI inflation in Hong Hong of 2.4% in January 2023 was its highest since 3.7% in August 2021.

South African consumer price inflation has slowed from a record high of 18.0% last July to 13.5% by December and a 10-month low of 12.7% last month.

Croatian CPI inflation of 12.7% last month represented a 5-month low.

In Zambia CPI inflation bounced above January’s 41-month low of 9.4% to a 2-month high of 9.6% this month.

The Confederation of British Industries’ monthly distributive trades index recovered more sharply to a reading of +2 in February from -23 in January. That represents a nearly flat performance after a deep dive the month before.

Board members of the Bank of Korea had progressively increased South Korea’s base rate from 1.0% to 3.5% in the half year between July 2022 and last month. At this month’s review, they decided to pause that tightening, deeming “it warranted to judge whether the Base Rate needs to rise further while maintaining the restrictive policy stance for a considerable time with an emphasis on ensuring price stability… Inflation is projected to remain high above the target level although the domestic economic growth rate has slowed, and uncertainties surrounding the policy decision are high.”

The Central Bank of Turkey‘s policy interest rate has swung widely since 2019. In 2020 when the pandemic first hit, the rate was initially cut by a total 375 basis points to 8.25% in January-May but then hiked 1,075 basis points to 19.0% by March 2021. Later that year, the rate was slashed 500 basis points in September-December and by an additional 500 basis points in August-November of 2022 to 9.0%. With so much rate reduction, Turkey regressed into a vicious cycle of domestic price inflation and lira depreciation, and officials had decided to stop easing. The horrific earthquakes that Turkey has experienced modified that intention once again, but today’s 50-basis cut to 8.5% represents a modest reaction to that disaster. With inflation running at 57.7% for consumer prices and 86.5% for producer prices, they want to be cautious, and today’s statement accentuates Turkey’s upside growth potential: “While the earthquake is expected to affect economic activity in the near term, it is anticipated that it will not have a permanent impact on performance of the Turkish economy in the medium term.  …The current monetary policy stance after the measured reduction is adequate to support the necessary recovery in the aftermath of the earthquake by maintaining price stability and financial stability.”

Just In: U.S. quarterly GDP growth last quarter was revised downward by 0.2 percentage points to 2.7% at an annualized rate, mainly reflecting a reduced rise of 1.4% in personal consumption versus 2.1% estimated earlier. The PCE price deflation, however, was revised somewhat higher to 5.7% year-on-year overall and 4.8% for the core PCE. Tight labor market conditions according to a separate release putting new jobless insurance claims at just 192k last week compared to 195k in each of the prior two weeks.

Copyright 2023, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

Tags: , , , ,


Comments are closed.