Equities and Dollar Slip, Japanese Growth Revised Lower
March 9, 2023
With Fed Chairman Powell’s two-day testimony over and the Beige Book published, the dollar fell overnight by 0.7% against the yen, 0.3% versus the Swiss franc, kiwi, Aussie dollar and sterling and 0.2% relative to the euro and Chinese yuan. Powell left scant doubt that multiple additional interest rate hikes like ahead, and the Fed’s Beige Book of regional economic conditions observed that in spite of growth stagnation in half of the 12 Fed districts, the labor market has stayed tight, and inflationary pressures remain broad.
U.S. Treasury yields this morning range from 5.27% on 6-month bills to 5.06% on the two-year note, but the 10-year bond held steady at 4.0%.
Quarterly GDP growth at 2.7% annualized in the United States last quarter proved considerably more resilient than in Euroland or Japan. Investors learned yesterday the GDP had been flat in the euro area, not up 0.1% (not annualized) as reported earlier. And today came news of a downward revision in Japanese growth last quarter as well to 0.1% annualized from 0.6% estimated initially on such a basis. Despite the disparity in growth, interest rates are being pulled higher in Europe and only remaining steady in Japan because the central bank there is maintaining a cap on the 10-year JGB at 0.50%.
Ten-year sovereign debt yields rose overnight by five basis points in France and four basis points in Germany, Italy, Spain, the Netherlands, and Great Britain.
Share prices closed down 0.6% in Hong Kong, 0.9% in India, 0.5% in South Korea and show losses currently ranging from 0.4% to 1.0% in major European markets. U.S. stock futures are down 0.5% in the case of the Nasdaq and off 0.3% for the S&P 500.
The price of Bitcoin is 0.4% softer, while those of WTI oil and gold have risen 0.6% and 0.2%.
Drilling down deeper into the Japanese GDP report, one sees that personal consumption was revised lower to 1.3% from the early estimated growth of 2.0% in the latest quarter. Business non-residential investment and inventories exerted a combined drag of 2.4 percentage points on growth. Calendar year GDP growth was halved to 1.0% in 2022 after 2.1% in 2021, -4.3% in 2020, -0.4% in 2019, +0.6% in 2018, 1.7% in 2017, 0.8% in 2016 and 0.3% in 2015. That’s a pretty abysmal record and was associated with GDP price deflator changes of +0.2% in 2022, -0.2% in 2021, 0.9% in 2020, 0.6% in 2019, zero percent in 2018, -0.1% in 2017 and 0.4% in 2016. A separate Japanese data release today revealed the largest year-on-year drop in machine tool orders (10.7%) in 29 months.
Today’s assortment of price data releases includes
- Much lower-than-forecast Chinese CPI figures for February (-0.5% versus January and a 12-month year-on-year low of 1.0% compared to a high of 2.8% last September.
- The biggest year-on-year decline in Chinese producer prices (1.4%) in 27 months.
- A 17-month low last month in Croatian producer price inflation (12.7%), which had been 17.2% in February 2022 and at a record 24.0% last June.
- An 18-month low in Lithuanian PPI inflation of 15.1% , down from a record 33.7% last June.
- A 66-month high in Egyptian consumer price inflation of 31.9% in February after such prices recorded their largest month-on-month jump (6.5%) in 400 months.
- Mexican CPI inflation of 7.6% in February was the lowest since March 2022 and down from a 260-month high of 8.7% touched last August and September.
Central bank officials announced the results of scheduled policy reviews today in Serbia and Malaysia. The Central Reserve Bank of Peru will do so later today.
Using increments of 25 or 50 basis points, the National Bank of Serbia began progressively raising its interest rate in April 2022 from a 1.0% level. Today’s third 25-bp hike of 2023 puts the key interest rate at 5.75%, its highest level since around mid-2015 and well above the pre-pandemic level of 2.25%. A statement from the NBS blames the current and record high 15.8% rate of consumer price inflation (versus a 1.5-4.5% target) on external price pressures and indicates that its interest rate hikes are meant to forestall second-order effects on domestically generated inflation. Officials expect inflation to begin subsiding in the second half of this year. Officials are hoping not to kill off future growth and “will assess whether there is a need to tighten monetary conditions further and to what extent, taking into account the anticipated effects of past monetary tightening on inflation going forward.”
Officials at Bank Negara Malaysia face a less extreme dilemma, since CPI inflation as of January had slowed to a 7-month low of 3.7% from a crest of 4.7% last August. Four hikes were implemented last year between May and November, each of just 25 basis points, and at 2.75% still has not returned to its pre-pandemic level of 3.0%. CPI inflation still exceeds the 2-3% target, and officials feel comfortable prioritizing growth: “The stance of monetary policy remains accommodative and supportive of economic growth. The MPC will continue to assess the impact of the cumulative OPR adjustments, given the lag effects of monetary policy on the economy.” Inflation is expect to slow further, and policy tightening has been paused since November.
U.S. new jobless insurance claims rose 21k last week. That’s the biggest week-to-week increase since late September, and the 211k level of new claims was the most since the week before Christmas. The Fed will need to see a lot more evidence that the tight labor market is softening from this weekly data point and the plethora of other labor market indicators attesting to a huge impediment to achieving the mandate of price stability. The immediate hurdle will be tomorrow’s employment situation report.
Copyright 2023, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Bank Negara Malaysia, Beige Book, Chinese CPI and PPI, Japan GDP growth, National Bank of Serbia
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