Powell Testimony, British CPI Shocker, and Concern about Growth in China at This Summer Solstice
June 21, 2023
On this longest day of sunlight in the Northern Hemisphere, Fed Chairman Powell will testify on U.S. economic conditions and Fed policy before the House Financial Services Committee beginning at 10:00 am EDT. He will be questioned on the precise meaning of the policy pause, the likely peak in Fed interest rates, and the time interval that rates are apt to remain at the peak. As always, he will be asked to comment on fiscal policy, an area that Fed officials repeatedly duck. Day two on Thursday of Powell’s scheduled semi-annual testimony will be before the Senate Banking Committee.
British consumer price inflation surpassed market expectations in May. The CPI advanced 0.7% relative to the prior month and maintained April’s year-on-year reading of 8.7%. While also its lowest since March 2022 and down from a 41-year high of 11.1%, 8.7% was 0.2 percentage points above what analysts had been forecasting. Even worse, core CPI inflation rose 0.2 percentage points to a 374-month high of 7.0% in May.
Chinese President Xi likely only agreed to meet with U.S. Secretary of State Blinken over the past weekend because China’s economy has far underperformed expectations this spring. An initial sign of life when Xi lifted the stringent restrictions on social gathering has sputtered, and the government’s growth target for 2023 is in grave difficulty amid a rising threat of outright deflation. Consumer price inflation of 2.8% last September in China has imploded to 0.1% in April and 0.2% in May. To promote social tranquility, Xi needs a greater willingness of foreign countries to buy Chinese exports, and that translates into temporarily back-peddling on the anti-U.S. Chinese nationalism that he previously whipped up. The Chinese yuan touched a 7-month low of 7.1981 per dollar earlier today.
The dollar is narrowly mixed ahead of Powell’s testimony, advancing overnight by 0.3% against the Australian dollar and sterling and by 0.2% versus the yen but sliding 0.3% against the peso and 0.1% relative to the Swiss franc, New Zealand dollar, Turkish lira and Canadian dollar. The euro relationship is perfectly steady.
The 10-year British gilt yield reacted adversely to the U.K. CPI report, climbing five basis points above yesterday’s close amid rising expectations that the Bank of England will have no choice but to raise its Bank rate by at least 25 basis points at tomorrow’s policy review. The 10-year U.S. Treasury yield is up two basis points, while its Japanese and German counterparts are respectively a basis point lower and unchanged.
Share prices today tumbled 2.0% in Hong Kong and 1.3% in China and also closed down 0.9% in South Korea and 0.6% in both Indonesia and Australia. European equities and U.S. stock futures are a touch lower.
There’s been little change in gold or oil prices, but the price of Bitcoin revived 2.2%.
In the face of unexpectedly elevated British CPI inflation, the concurrent release of producer price figures from the U.K. was overlooked. Producer output prices dropped 0.5% on month and to a 26-month low of 2.9% in year-on-year terms. Core producer output price inflation of 4.1% was meanwhile down from 6.0% in April and 11.2% in January, and producer input price inflation dropped to 0.5% from 4.0%.
In separate British data releases, fiscal debt went above 100.0% of GDP for the first time in over 60 years last month, and the orders subindex of the CBI’s monthly industrial trends survey (-15 in June) was less negative than in the first five months of this year.
South African consumer price inflation fell to a 13-month low of 6.3% in May from 6.8% in April and a 13-year peak of 7.8% last July, but core inflation of 5.2% was a mere 0.1 percentage point under April’s multiyear high.
South Korean producer prices fell 0.3% on month in May and to a 29-month low of 0.6% in May, which compares to a 164-month peak of 10.0% in June 2022.
Polish producer prices fell 16% in May following a 1.3% drop in April, depressing its 12-month increase to a 27-month low of 3.1%. A 27-year peak of 25.6% had been hit last June.
Latvian producer price inflation of 4.6% last month was down from 10.6% in April and a record high of 37.7% in August 2022.
Similarly in Slovenia, PPI inflation reached a 27-month low of 6.6% last month versus a record high of 22.5% a year earlier.
Turkish business sentiment dipped marginally in June below May’s one-year high, and Dutch consumer confidence fell further this month to a 3-month high. But Belgian consumer confidence printed at -9 for the third time in four months. Belgian and Dutch consumer confidence had each bottomed out last Octobe.
On the central banking front, minutes from the Bank of Japan Board policy meeting acknowledge a number of inflation-lifting factors currently at work but also express doubt that such will endure. Officials on balance remain very worried that any sign of thinking about exiting the ultra-loose monetary stance might jeopardize all the delicate progress toward sustained 2% inflation that has been achieved so far. There are two very different inferences that one can therefore draw: policy isn’t going to begin tightening anytime soon, or that the start of tightening will occur with a bang and without any forward guidance to prepare markets ahead of time.
At the National Bank of Georgia, the key interest rate was left unchanged at 10.5%. Such had been cut by 50 basis points at the prior meeting in May and thus remains at the same level that prevailed briefly between December 2021 and March 2022. A pandemic low of 8.0% existed from August 2020 until March 2021. Following a steep drop of CPI inflation from 12.8% in June 2022 to 1.5% last month, officials felt safe to lower interest rates. “Considering the inflation dynamics and forecasts at the previous Monetary Policy Committee meeting, the NBG decided to start a gradual exit from its tight monetary policy stance, which implies policy rate reduction at a moderate pace. At the previous meeting, the policy rate was reduced by 50 basis points.”
A scheduled policy review at the Czech National Bank today kept the two-week repo rate at 7.0%. Czech CPI inflation of 11.1% last month had failed to decelerate as much as markets were expecting. Beginning in June 2021 from a pandemic low of 0.25%, the key interest rate was raised to 3.75% by the end of that year and to its present level of 7.0% by mid-2022. Central bank officials remain fearful of the potential inflationary effects of excessive foreign exchange volatility and again included in today’s announcement the warning in caps that “The Bank Board also decided that the CNB will continue to prevent excessive fluctuations of the koruna exchange rate.”
Canada’s retail sales report today was more than respectable. Not only was the initial estimated 0.2% rise in April revised to an advance of 1.1% on month, but May’s initial observation also showed a 0.5% increase. That would be the third increase so far this year and put sales around 1.3% above the end-2022 level.
Copyright 2023, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Belgian and Dutch consumer confidence, BOJ minutes, British CPI and PPI, Czech National Bank, National Bank of Georgia
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