Assessing the Situation in Russia and What It Portends for Global Growth and Inflation
June 26, 2023
U.S. stock futures this Monday are effectively unchanged. Investors are uncertain if the aborted coup in Russia will endure and how the global economy will be affected by Russian political instability. Share prices closed down by 1.5% in China, 0.9% in New Zealand, 0.8% in Taiwan, 0.5% in Hong Kong and South Korea, and 0.3% in Japan, but have barely moved in Europe.
Investors are also digesting a weak monthly IFO Institute report on Germany’s business climate. The June reading of 88.5 was down three points and, like the assessment of current economic conditions, at a 7-month low. Economic expectations dropped 4.7 points to a 6-month low. IFO officials proclaimed that weakness in manufacturing is steering europe’s largest economy into turbulent water. The factory sector subindex dropped to -9.9 from -0.6 in the prior month and +6.3 in April. Indices for other sectors fell to a 7-month low in trade, a 5-month low in construction and a 4-month low in services. Germany appears well on its way to scoring a third straight quarter-on-quarter contraction in GDP.
The lead article of this week’s edition of The Economist, entitled “The Trouble with Sticky Inflation“, concludes
Central banks face agonizing choices. They are likely to steer a course between high inflation and recession. Investors seem to believe that this can still end well, but the chances are that it won’t.
Still another important theme at the start of the last week in June concerns Bank of Japan policy and the yen. An early summary of this month’s BOJ Board meeting that left policy unchanged included for the first time a minority opinion urging an early review of the policy capping upside movement in the 10-year JGB yield at 0.50% and expressing concern about financial market instability when policy eventually begins to exit the currently ultra-loose policy stance. The BOJ policy has become increasingly out of step with tighter stances in most other countries, and this has put downward pressure on the yen. Over the weekend, Japan’s Vice Finance Minister for International Affairs Kanda called the yen’s recent behavior “rapid, one-sided, and no good,” and he issued a veiled threat that the government may employ forex intervention, a rarely used tool these days, to counter-punch the yen’s weakness.
The dollar opened the week on a modestly softer note, dipping overnight by 0.3% against the yen and 2% versus the euro and loonie, but also dropping by 0.7% against the Swiss franc and 0.9% relative to the kiwi. Alternatively, the greenback is steady against sterling and the Aussie dollar and has jumped another 2.6% against the free-falling Turkish lira.
Risk aversion related to recessionary fears have been associated with a five-basis point drop in the yields on 10-year U.S. Treasury notes, German bunds, and British gilts.
The price of Bitcoin has slipped 0.5%, while those for gold and WTI oil are up 0.7% and 0.6%.
Among price data reported today,
- Japanese corporate service price inflation of 1.6% in both April and May was similar to last year’s average pace of 1.7%.
- Icelandic producer prices recorded a 5.0% year-on-year drop in May. That was the third sub-zero reading in a row and down from a 146-month high of 29.6% in April 2022, but it was not as steeply negative as -7.0% in the 12 months through April 2023.
- Year-on-year drops of 6.9% and 6.5% in Spanish and Finnish producer prices last month were each their most negative readings in three years. Record high PPI readings had been posted of 47.0% in Spain in May 2022 and in Finland of 32.5% in June 2022.
- Bosnian CPI inflation slowed to an 18-month low of 6.5% in May from 7.9% in the prior month and a record high of 17.4% last October.
In Britain, where inflation has been especially sticky, the CBI distributive trades survey posted another low reading in June, this time of -9 after -10 in May and +5 in April.
Factory output in Singapore tumbled 10.8% in May from a year earlier, its largest such drop since December 2015. Taiwanese industrial production in May was 15.7% weaker than a year earlier, in contrast to a 16.6% on-year increase in Taiwanese retail sales.
Whereas Brazilian consumer sentiment improved to a 52-month high in June, consumer confidence this month deteriorated in the Czech Republic to a 5-month low. The weakness of business conditions in Germany has infected other European economies. Czech business confidence, for instance, swung from a 9-month high in April to a 27-month low by June.
Copyright 2023, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: BOJ Summary, German IFO Business climate index, Masato Kanda
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