Fitch’s Downgrade of the U.S. Debt Rating Pushes Long-Term Interest Rates Higher
August 3, 2023
In the wake of the announced downgrading of U.S. government debt and amid doubts about a coming recession, the 10-year Treasury yield rose nine basis points overnight and touched a high of 4.18%, which compares to 3.31% just over four months ago. 4.18% is the highest level since early last November. Other 10-year sovereign debt yields saw overnight increases of three basis points in Japan, six bps in Germany, Spain, and Great Britain, and five bps in France.
Equities are experiencing another down day, with drops of 1.7% in Japan, 1.9% in Taiwan, 0.6% in Singapore, and 0.5% in Hong Kong. European stock markets have dropped between 0.5% and 1.0% so far, while U.S. share price losses have been somewhat less. The price of WTI oil climbed 1.5%.
The dollar has fallen 0.5% against the yen and 0.2% versus the Swiss franc but also has risen 1.4% against the Mexican peso, 0.4% relative to sterling and 0.1% against the euro and Canadian, Australian and New Zealand currencies. Gold is 0.3% softer.
The Bank of England raised its bank rate by 25 basis points after a 6-3 vote that included two dissents favoring a 50-bp tightening and one committee member who preferred leaving the key rate steady. At 5.25%, the new rate level after 14 increases since December 2021 has climbed a total of 515 basis points. Today’s statement of explanation notes that inflation, while now past its peak remains too high. The problem is blamed on a series of shocks beginning with Covid but including Russia’s war and a shrinking labor force that’s put upward pressure on wages. Consumer price inflation was at 7.9% as of July versus 11.1% last October. Service sector prices continue to rise far to quickly, for example, and some risk factors flagged in May have since crystalized. “If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required. The MPC will ensure that Bank Rate is sufficiently restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term, in line with its remit.” CPI inflation is now expected to drop to 5.0% by end-2023 but not meet target until around mid-2025.
The Central Bank of Brazil’s Selic interest rate was cut more sharply than anticipated to 13.25%. Such had been at 13.75% since the last hike in a long tightening cycle was done in August 2022. In all, the rate climbed 450 basis points in 2022 and 725 bps in 2021 from a pandemic base of 2.0% reached in August 2020. Brazilian CPI inflation crested in April 2022 at a 222-month high of 12.1%, had declined to 8.7% by the time of the final central bank rate hike and currently stands at a 33-month low of 3.16%. The explanatory statement following today’s first rate cut in three years stresses “the need to persist on a contractionary monetary policy until the disinflationary process consolidates and inflation expectations anchor around its targets.” The decision to cut the rate by 50 basis points rather than 25 bps was reached by a thin 5-4 vote.
This week’s flood of economic data releases continued this Thursday. From the United States came news of
- Only a slight uptick in new jobless insurance claims last week and the lowest 4-week average in such since the week of March 11.
- A 3.7% quarterly leap U.S. non-farm productivity in 2Q, which was almost twice what had been expected, and its first year-on-year increase (1.3%) in six quarters. Productivity fell 1.6% in 2022.
- A reduced 1.6% quarterly rise in unit labor costs, resulting in the smallest on-year advance (2.4%) in two years. That compared to an average 6.1% rise in 2022.
- Factory orders jumped 2.3% in June despite only a 0.1% rise in orders for non-durable goods.
- The ISM non-manufacturing purchasing managers index settled back to a 2-month low of 52.7 in July but also revealed stronger service-sector inflationary pressure than seen in June.
- Five-month lows were recorded in the S&P Global composite and service sector PMIs of 52.0 and 52.3.
Producer prices in Euroland posted their second straight year-on-year decline. The 12-month drop of 3.4% in June was the most in three years and down from a record +43.4% PPI inflation rate last August.
Swiss consumer prices in July dipped 0.1% on month and rose 1.6% on year, lowest since January 2022.
Turkish consumer prices catapulted 9.5% on month in July, lifting year-on-year inflation by 9.6 percentage points to 47.8%, which represents a 4-month high and embodies an 8-month high in core CPI inflation of 56.1%. Separately, producer prices also leaped 8.2% and were 44.5% above the July 2022 level. Lira depreciation was a key factor in this inflationary setback and has prompted Turkey’s central bank to raise interest rates by a combined 900 basis points in June and July.
Australian retail sales volume fell 0.8% in June and by 0.5% in the second quarter.
The German trade surplus widened to a seasonally adjusted EUR 18.7 billion in June, a 29-month high, from a EUR 15.4 billion monthly average in January-May. Exports only ticked 0.1% higher on month, but imports fell by 3.4%.
The Hong Kong private-sector PMI fell to an 8-month low of 49.4, undershooting expectations. Singapore’s private PMI rose to a 2-month high of 49.8, but South Africa’s PMI slid back to a 2-month low of 48.2. All three of these results failed to reach the 50 level that divides expanding activity from a contraction. Lebanon’s PMI met that standard for a second straight month but just barely at 50.3.
Among non-oil purchasing manager surveys in July, Egypt‘s rose to a 23-month high of 49.2, while the Saudi and U.A.E. indices fell to 7-month lows of 57.7 and 56.0.
Euroland’s composite and service-sector PMIs printed at 8- and 6-month lows of 48.6 and 50.9 in July. The results were characterized as a bad start for the third quarter, mainly led by manufacturing but accompanied by less dynamism in services. At best, employment growth seems likely to pause, and the improvement of inflation may be stalling, too. Among reporting members in the euro area, the German, Italian, and Irish composite PMI readings were at 8-month lows, Spain’s was at a 6-month low, and France’s 46.6 reading was at a 32-month low and the weakest of the bunch.
The British composite and service-sector PMI readings of 50.8 and 51.5 were at 6-month lows.
Despite a 2-month high Chinese service sector PMI score of 54.1, the composite Chinese reading fell to a 6-month low of 51.9. Doubt is creeping in that the government won’t inject enough fiscal support.
In India, by contrast, the composite PMI score of 61.8 was the most ever in this decade-old data series, while the service-sector PMI improved 3.8 points to a 157-month high.
Australia‘s composite and services PMI readings weakened to 7-month lows of 48.2 and 47.9.
Japan‘s composite and service PMIs printed at 2- and 6-month lows but at least stayed above 50, specifically at 52.2 and 53.8, respectively.
Sweden‘s composite and service PMI readings were an 8-month high of 51.3 and a 7-month high of 52.7.
Putin’s ill-advised war of aggression is hurting the Russian economy, where composite and service sector PMIs fell to 5-month lows in July.
Brazil‘s composite PMI slipped under the 50 breakeven threshold to a 7-month low of 49.6. The service sector index dropped 3.1 points to 50.2.
Copyright 2023, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Euroland PPI, Service PMIs, Swiss CPI, Turkish CPI and PPI
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