Central Bank Decisions, a U.S. PMI Surprise, and a Further Advance in the Price of Oil

September 6, 2023

The U.S. Institute of Supply Management delivered a surprisingly buoyant U.S. non-manufacturing purchasing managers survey for the month of August, showing an overall 6-month high reading of 54.5 versus 52.7 in July and including a 2.1-point increase in the inflation subindex to 58.9. This news eclipsed the other S&P Global U.S. PMI news of 6- and 7-month lows in the composite and service PMIs and combined with this week’s grinding rise of oil prices to above $86 per barrel for WTI to drive speculation that Federal Reserve officials may have no choice but to raise interest rates again at next month’s review of monetary policy.

This backdrop has been difficult for equities around the world. Share prices this Wednesday closed 0.6% higher in Japan but down by 0.8% in Australia and 0.7% in South Korea. European losses so far have been led by a 2.4% slump in Poland and included drops of  1.4% in Italy, 0.9% in France, 0.8% in Spain and 0.7% in the United Kingdom. The Nasdaq, SPX, and DOW are currently down 1.2%, 0.9% and 0.6%, and ten-year German bund and U.S. Treasury yields have risen by four and three basis points.

The dollar today has strengthened 1.9% against the Polish zloty and shows a two-day 3.0% advance versus that currency, which was hurt by a greater-than-anticipated 75-basis point decrease in the National Bank of Poland‘s reference interest rate to 6.0%. During 2022, the central bank’s interest rate had been increased seven times and by a total of 500 basis points to 6.75% to counter accelerating inflation, which crested at 18.4% last February. Inflation retreated subsequently but remains problematic at 10.1% as of last month. An election scheduled for less than six weeks from today in which the conservative government is seeking a third term amid stagnating economic growth apparently added urgency to central bank officials wishing to help influence the outcome.

In the Council’s assessment, recently incoming data point to a weaker demand pressure than previously expected, which will contribute to a faster return of inflation to the NBP inflation target. Considering these circumstances – and taking into account the time lags in the monetary policy transmission to the economy – the Council adjusted NBP interest rates, which will be conducive to meeting the NBP inflation target in the medium term. The Council upheld the assessment that the decrease in inflation would be faster if supported by an appreciation of the zloty exchange rate.

Against other currencies today, the dollar has risen thus far by 1.5% versus the Russian ruble, 1.1% relative to the Mexican peso, 0.6% vis-a-vis sterling, 0.4% against the Swiss franc, 0.3% relative to the Australian dollar, and 0.2% versus the euro and Canadian dollar. The yen rebounded 0.1% but remains weaker than 147.5 per dollar and very close to this week’s year-to-date low.

Central bank rates after scheduled policy review in Australia yesterday and Canada today were left unchanged at 4.10% and 5.0%, respectively. Australia’s official cash rate had been increased eight times by a total of 300 basis points in 2022 followed by four 25-basis point hikes this year and most recently at the July board meeting. The Bank of Canada’s rate target similarly rose by a total of four percentage points during 2022 from 0.25% to 4.25% followed by three 25-basis point increases this year and most recently in July. In each of these instances, officials noted that monetary policy impacts growth and inflation with a lag and that considerable restraint has yet to achieve their eventual full impact. Also in each case, released statements leave open the possibility of a further interest rate hike and note too that significant uncertainties surround the outlook for inflation. The impacts of slower growth on corporate pricing decisions and wage awards and the evolution of inflation and measures of expected inflation will influence future policy.

Germany announced a big data surprise today. Factory orders in Europe’s largest economy plunged 11.7% on month in July, reversing much of the back-to-back increases in May and June and shifting the year-on-year change from +3.0% in June to -10.5% in July. Orders for capital goods plunged 15.9%, and orders from abroad also recorded a double-digit monthly decrease.

Construction activity in Europe has been clobbered by tightening credit conditions to address the worst inflation in decades. Purchasing manager indices for that sector reported today printed at a 2-month low of 50.8 for the U.K., 8-month lows of 43.2 and 42.4 in Euroland and Germany, a 5-month low of 47.7 in Italy and a 3-month high of only 41.5 in German.

U.S. and Canadian trade figures got released today. The U.S. $65.022 billion goods and services deficit in July was 9.3% smaller than in July 2022. Year-to-date imports fell 4.3% in contrast to a year-to-date 1.6% rise in exports. While the U.S. data approximated what analysts were anticipating, Canada’s July deficit of C$ 987 million was considerably less than expected and down from a C$ 4.917 billion deficit in June.

Great Britain’s composite services plus manufacturing purchasing managers index in August was revised up 0.7 points but was still at a 7-month low of 48.6. Euroland’s composite PMI was revised downward, by contrast, to a 33-month low of 46.7, including a 44.6 score from Germany. Japan’s composite PMI was revised higher to a 3-month high of 52.6, while China’s composite PMI reading was at a 7-month low of 51.7.

Copyright 2023, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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