FOMC Day, And Inflation Reports Around the World Aren’t Cooperating
March 22, 2023
Financial markets have positioned for a 25-basis point hike of the federal funds rate later today, which would represent a compromise between conceding the the task of restoring in-target U.S. inflation is still far from accomplished and concern over the way that mid-sized banks have handled the considerable interest rate increase over the past year.
An under-appreciated dimension of the excessive elevation of U.S. inflation since 2021 is the global nature of the problem. Even with a strong dollar, the United States has been importing a lot of inflation. There have been several higher-than-expected price reports out today.
- British consumer price inflation of 10.4% last month was a half percentage point greater than forecast and 0.3 percentage points above January’s 12-month rate of CPI increase. Core inflation rose 0.3 percentage points as well to 6.2%, and food price inflation of 18.0% was the biggest on-year jump in 546 months.
- Although lower than in January, British producer output and producer input price inflation last month remained in double-digit territory at 12.1% and 12.7%. Retail prices in the U.K. climbed 1.2% on month and 13.8% on year.
- A 0.7% month-on-month rise in South African consumer prices in February was the most in seven months and lifted their 12-month rate of increase to 7.0%. Underlying core CPI hit a six-year peak of 5.2%.
- Consumer price inflation in Lebanon reaccelerated from an 18-month low of 122% at the end of 2022 to 189.7% in February, which represents an 8-month peak and not terribly far from the country’s record CPI inflation of 239.7% touched in January 2022.
- Moroccan consumer prices leaped 1.7% on month, elevating year-on-year inflation to a record high of 10.1% from 8.9% in the prior month, 3.6% in February 2022 and an extreme low of 0.1% in March 2021.
In financial market activity overnight, the ten-year U.S. treasury yield firmed one more basis point to 3.62%. That rise was dwarfed by increases of 13 basis points in the 10-year British gilt yield and sovereign debt yield increases of 10 basis points in Italy, 8 bps in Japan and Spain, and 7 bps in the Netherlands and France. Stock markets continued to recover in the Pacific Rim and Europe, with gains of 1.9% in Japan, 1.7% in Hong Kong, 1.6% in Taiwan, 1.2% in South Korea and Indonesia, 0.9% in in Australia and so far 0.3% in the U.K., Germany, France, Spain and Italy. U.S. equity futures are unchanged as investors await the Fed’s interest rate decision, updated macroeconomic forecasts, and Chairman Powell’s press conference.
The price of bitcoin tokens has also been unchanged. The prices of WTI oil and gold are respectively down 0.6% and up 0.2%. The dollar has weakened 0.4% against sterling and 0.3% relative to the euro, Aussie dollar, kiwi and Mexican peso, but risen 0.3% further against the yen.
Other data out today suggests weakening global demand and confidence. South Africa’s leading business cycle measure posted a fourth consecutive monthly decline, and another drop in the Westpac index of Australian leading economic indicators led its compiler to project a slowdown in GDP growth to only 1% this year. The orders index in the Confederation of British Industry’s monthly industrial trends survey fell four index points to a 25-month low of -20 in March, which contrasts with the record high of +26 reached last year in March and May. Belgian and Dutch consumer confidence this month in negative territory at a 2-month low of -9 and a 1-year high of -39, respectively.
Euroland’s seasonally adjusted current account was in surplus for a second straight month in December. The EUR 15.9 billion surplus rose November’s EUR 12.8 billion but only because imports (-2.4% on month) dropped more sharply than exports (-1.6%). A EUR 93.1 billion deficit was experienced in 2022 as a whole, equivalent to -0.7% of nominal GDP. That was a 3.0 percentage point adverse swing from a 2021 surplus equivalent to 2.3% of GDP.
The Swiss current account surplus, which ballooned from 2.8% of GDP in 2020 to 9.3% of GDP in 2021, was CHF 14.7 billion in the final quarter 2022 and about 20% larger in 2022 at CHF 77.7 billion than in the prior year.
Whereas the Federal Reserve is expected to raise its interest rate only slightly today, the Central Bank of Iceland’s seven-day term deposit rate was lifted by a full percentage point to 7.5%. That increment represents a doubling of the previous 50-basis point hike last month, which in turn was double the 25-basis point moves in October and November. At 100 basis points, Icelandic monetary officials have returned to the size of the back-to-back increases last May and June, which had been the largest previous increments in the current monetary tightening cycle. The cycle began back May 2021 from a pandemic low of only 0.75% reached in October 2020. A statement released by Iceland’s monetary policy committee says that in the face of more widespread price increases, elevated expected inflation that exceeds target, a recent drop in its inflation-adjusted interest rate, a tight labor market and the fact that both inflation and domestic demand growth had recently exceeded what officials were presuming only a month ago, the need has become more urgent to forestall a wage-price upward spiral.
Copyright 2023, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: British CPI and PPI, Central Bank of Iceland, Euroland and Swiss current accounts
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