Optimism Growing that U.S. Debt Default Can Be Averted; Inflation Still Too High; and G7 Leaders Gathering in Hiroshima for Annual Summit
May 18, 2023
Negotiator comments that progress is being made in the U.S. debt ceiling talks is better than the alternative, but investor caution is advised. The vote to elect Kevin McCarthy Speaker of the House underscored the great difficulty in getting Republican members to agree on anything constructive. Best to assume that a U.S. default has been averted only when such actually happens.
After rallying on Wednesday, U.S. share prices show a dip in the DOW but additional rises in the S&P 500 and Nasdaq. Stock markets in the Pacific Rim closed up 1.6% in Japan, 1.1% in Taiwan, 0.9% in hong Kong and 0.8% in South Korea. Led by a 1.3% rise so far in the German DAX, European markets are up as well.
The dollar strengthened overnight by 0.6% against the Chinese yuan and Australian dollar, 0.5% versus the euro, and 0.4% relaitive to the Japanese yen, Swiss franc, and sterling. The DXY weighted dollar index rose to its best level since St. Patrick’s Day.
Recent comments from Federal Reserve officials have clearly been intended to quash any speculation of a near-term rate cut. Inflation remains problematic in the United States and many other countries. Although goods prices have crested for the most part, the big concern has become service sector prices. The longer inflation remains substantially above target, the greater becomes the perceived risk to central bank policy credibility. So far medium-term price expectations have remained pretty well anchored, but it’s imperative for inflation to keep receding to insure that remains the case.
Accordingly, ten-year sovereign debt yields today have risen 11 basis points in Italy and the U.K., 10 bps in France and Spain, 9 bps in Germany, and five basis points in the United States.
It’s been a down day so far for crypto (-0.5%), gold (-1.0%) and oil prices (-0.5%).
Today’s menu of reported price statistics includes
- Eight and seven-quarter lows in New Zealand producer input and producer output price inflation of 4.7% and 5.3%, respectfully, during 1Q 2023.
- Czech producer prices dropped 1.2% on month in April to post the lowest year-on-year advance (6.4%) in 22 months, which was down from a 30-year high last June of 28.5%.
- Portuguese producer price inflation turned negative in April (-0.9%) for the first time in 26 months, having peaked at 26.3% in March 2022.
Aside from containing price expectations, the channel through which tightening monetary policy reduced inflation is by slowing an economy’s aggregate demand growth. The Conference Board’s index of U.S. leading economic indicators in April reported today was down 0.6% on month and 4.4% over the last half-year period, signaling “a worsening U.S. economic outlook.” A separate data item today revealed a further 3.4% drop in U.S. existing home sales last month to a 3-month low. But new jobless insurance claims, which had spiked to an 18-month high of 264k in the week of May 6 returned to the 242k level in the final week of April.
Australian labor market conditions were not as tight in April as in March. The jobless rate rose 0.2 percentage points to a 3-month high of 3.7%. Employment declined by 4.3k, and the labor market participation rate ticked 0.1 percentage point lower to 66.7%.
Japan’s trade deficit narrowed in April to JPY 432 billion from JPY 753 billion in March, thanks to the first on-year slide of imports in 27 months. Export growth was weak, too. Net exports in the first quarter had exerted a 1.3 percentage point drag on GDP growth. In seasonally adjusted terms, the trade deficit fell 16% on month to JPY 1.017 trillion last month.
As expected, officials at the Central Bank of the Philippines to not raise its 6.25% interest rate further after this month’s scheduled monetary policy review. The decision was characterized as a “pause” rather than a signal that a peak level has necessarily been reached. With CPI inflation down to 6.6% as of April from a 14-year high of 8.7% in January, 6.25% was deemed appropriate for now. But 6.6% is still well above the 2-4% inflation target, and inflationary risks according to a released statement are still skewed to the upside. “The BSP stands ready to resume monetary tightening as necessitated by emerging data, consistent with its primary mandate to promote price and financial stability.”
Mexican monetary policy is also being reviewed today.
This year’s annual summit of Group of Seven leaders is set for Hiroshima on May 19-21 and is expected to focus in particular on the war in Ukraine, challenges posed by China’s foreign and economic policies, and how governments can best ensure that benefits from artificial intelligence are not far exceeded by AI’s potential negative impact on civilization.
Copyright 2023, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: 2023 Group of Seven summit, Australian labor market statistics, Bangko Sentral Ng Pilipinas, Japanese trade balance, U.S. index of leading economic indicators and existing home sales
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