Almost Solid Front of Hawkish Central Bank Policies With a Mounting Focus on Squelching Wage Pressure and Service Sector Prices
June 29, 2023
The leaders of the Federal Reserve, Bank of England, European Central Bank and Bank of Japan participated in a panel discussion yesterday. Powell, Bailey, and Lagarde attempted to outdo each other in displaying their commitment to lowering inflation. Whatever the cost in the short run, each insisted the long-term costs would be even greater if the inflation problem is not sufficiently addressed now. The outlier, to nobody’s surprise, was BOJ Governor Ueda. While projecting inflation above the 2.0% target, Ueda and his BOJ colleagues distrust their projection given Japan’s decades of sub-target inflation, and the example of Japan is a blemish on the almost universally accepted beliefs that elevated inflation is always bad and that equities always yield positive returns in the long run. A third of a century later, the Japanese Nikkei remains below its highest level ever reached on the final business day of 1989, and the ensuing bear market was promoted by a series of Bank of Japan rate hikes begun late that year meant to reduce CPI inflation that that crested at 4.2% in 1990 but was followed by decades of trying to dig out of an ensuing deflationary hole.
The Swedish Riksbank today became the latest central bank to hike its interest rate higher. That central bank’s policy rate had been -0.50% from early 2016 until an initial hike late in 2018 but was still a mere zero percent when raised 25 basis points in April 2022. By end-2022, such had been raised to 2.50%. 2023 brought more increases: 50 bps in February and April and now 25 bps in June to 3.75%, with a forecast “for the policy rate to be increased at least one more time this year. The Executive Board has also decided to increase the pace of government bond sales from SEK 3.5 billion to 5 billion per month with effect from September this year.” The statement asserts that “new information, such as service prices rising unexpectedly rapidly and a weaker krona, indicates that inflation is declining more slowly than expected.”
Thursday has offered its share of data surprises, starting with two eagerly awaited U.S. reports:
U.S. real GDP growth last quarter has been revised upward by a much greater-than-expected 0.7 percentage points to 2.0% at an annualized rate compared to 4Q 2022 and by 0.2 percentage points from 1Q 2022 to 1.8%. Personal consumption soared 4.2% on quarter, and exports were revised to a 7.8% advance. One wouldn’t know it from recent opinion polls showing rising disapproval of Biden’s handling of the economy, but America’s economic growth advantage over other industrialized economies is widening sharply. The 2.0% pace of U.S. growth last quarter stacks up well against 1.1% in Switzerland, 0.9% in Australia, 0.5% in Great Britain and -0.4% in Euroland which was the euro bloc’s second contraction in a row.
The U.S. also reported the largest week-to-week decline in new jobless insurance claims (239k last week after 265k in the week of June 17) in twenty months.
Economic sentiment in the euro area worsened more sharply than expected to a 7-month low in June. Sentiment indices were at a 33-month low in the industrial sector and an8-month low in services. Consumer confidence, on the other hand, was confirmed at a 16-month high.
In Japan, consumer sentiment improved 0.2 index points to a 17-month high in June, and retail sales in May went up by a greater-than-forecast 1.3% versus April and 5.7% year-on-year.
South African consumer confidence softened further to a one-year low this quarter, printing at -25 following readings of -23 in 1Q and -8 in the last quarter of 2022.
South Korean business confidence held steady in June at May’s 11-month high.
Swedish consumer confidence rose to a 1-year high in June. Swedish retail sales rose 03% on month but fell 5.4% on year in May, which was the smallest 12-month decline in six months.
German consumer price inflation accelerated to a 2-month high of 6.4% in June, led by an 0.8 percentage point hike in service sector inflation to 5.3%. Core CPI (which excludes food and energy) of 5.8% this month has been almost three times greater than the ECB’s inflation target.
Spanish CPI inflation slowed sharply overall to 1.9% in June from 3.2% in May and a 454-month high of 10.8% last July, but sticky core inflation only declined 0.2 percentage points to 5.9%.
South African producer price inflation dropped to a 21-month low of 7.3% in May from 8.6% in April and a record 18.0% last July.
Spanish and Dutch business confidence weakened to a 32-month low and a 28-month low this month. But business confidence improved in Sweden to a 9-month high.
Australian retail sales outperformed expectations in May, rising 0.7% on month and 4.2% on year. That still down from a year-on-year jump of around 18% last August.
The upward revision of U.S. GDP growth triggered a reversal in the dollar, which had been showing a modest 0.1% weighted dip overnight just prior to the release. By 10 am EDT, the DXY index was 0.5% above Wednesday closing level, including gains of 0.5% against the euro and 0.3% against the yen, Swiss franc and sterling. At 144.89 yen per dollar, the market has returned to the 145-146 zone that provoked Japanese intervention support for the yen last September.
The ten-year U.S. Treasury yield has gone from showing a 4-basis point rise just prior to the GDP release to a net 13-basis point upsurge on the day, and it has levitated other sovereign debt yields, which for instance now show gains today of 9 basis points in Germany and 7 bps in Great Britain.
U.S. stocks have more than held their ground in spite of the higher yields. The DJIA and SPX rose 0.4% and 0.2% in the first half hour of trading. The Paris Cac is up similarly, but the British Ftse and German DAX are respectively down 0.4% and flat. In the Pacific Rim, share prices closed down 1.2% in Hong Kong and 0.2% in China but up 0.6% in South Korea and 0.1% in Japan.
Prices for oil and gold are 0.5% higher and 0.8% lower. Bitcoin has advanced 1.5%.
Copyright 2023, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Euroland economic sentiment, German CPI, Swedish Riksbank, U.S. GDP
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