Dollar and Price of Oil Strengthen Further

September 15, 2023

Chinese data for August released Friday beat expectations. On year increases in retail sales and industrial production of 4.6% and 4.5% represent 3- and 4-month highs, and the jobless rate fell 0.1 percentage point back to the 5.2% level of the second quarter. That was the lowest in 16 months. To be sure, there were also some reminders of China’s struggles in today’s batch of economic releases such as the largest monthly drop in property prices in ten months (-0.3%), resulting in a 0.1% year-on-year dip, or the tepid 3.2% on-year increase in business investment over the first eight months of 2023, down from a 3.8% rise in the first half of this year.

Although the Shanghai composite stock index closed down 0.3% today, rallies elsewhere in the Pacific Rim saw share prices close up 1.3% in Australia, 1.1% in Japan and South Korea, 1.0% in Singapore, 0.8% in Hong Kong, and 0.7% in Taiwan. The German Dax and Paris Cac are so far up 1.0% and 1.5%, and U.S. stock futures are holding onto yesterday’s gains.

Oil prices continue to grind upward and are at a 10-month high. West Texas Intermediate is up 0.4% so far today and touched $91.15 per barrel overnight, which represents a 43% advance since this year’s low in mid-March.

On the heels of yesterday’s message from the European Central Bank that its new 4.5% refinancing rate may not need to be lifted further, the weighted DXY dollar index climbed to a six-month high, 5.7% above its level on July 13th. Compared to Thursday closing levels, the dollar currently has settled back 0.2% against the euro, sterling and Australian dollar but is unchanged versus the Swiss franc and loonie and 0.2% stronger against the yen. Chinese data buoyed the yuan 0.4%.

The price of bitcoin has also risen 0.4%, and ten-year sovereign debt yields are up 7 basis points in Italy, 6 bps in the U.K., France and Spain, 5 bps in Germany and 3 bps in the United States, lifted by yesterday’s higher-than-forecast producer price inflation report and the ECB’s tenth interest rate hike since mid-2022.

Today’s U.S. economic data menu will feature import prices, industrial production, capacity use, the Empire State manufacturing survey, and the U. Michigan consumer sentiment index.

Price news already reported today by other countries include

  • An upward revision of French CPI inflation to a 3-month high of 4.9% in August. That compares with last February’s 453-month peak of 6.3%.
  • A downward revision in Italian CPI inflation of 5.4% last month, which compares with 9.1% a half year earlier and a 37-year peak of 11.8% in October and November of 2022.
  • A deceleration of on-year growth in hourly labor costs in the euro area to 4.5% last quarter from 5.2% in the first quarter, 5.9% in 4Q 2022, and 5.2% in the second quarter of 2022.
  • Polish CPI inflation of 10.1% in August was left unrevised at 10.1%. That’s down from February’s 319-month peak of 18.4% and represents the lowest point in a year and a half. Croatian CPI inflation of 7.8% also matched its preliminary estimate.
  • Bulgarian consumer price inflation dropped 0.8 percentage points to a 21-month low in August of 10.1%, having crested at a 24-year high of 18.7% in September 2022.

Faced with consumer price inflation that in between May and August accelerated to a 9.9% annualized pace, the Central Bank of Russia felt compelled to lift its interest rate by another full percentage point to 13.0%. This increase comes on top of hikes of 100 bps in July and 350 bps in August. Putin’s reckless and Quixotic war to restore a Russian Empire has put the countries central bank in a very difficult spot, leading to wide policy swings. The key rate was cut in 2020 by 200 basis points to a pandemic low of 4.25%. As inflation picked up subsequently, the central bank interest rate doubled during 2021 and then catapulted 1,150 basis points to 20% in two moves at the start of the war in February 2022. To prove that western sanctions weren’t working and to forestall a deeper economic downturn, the key interest rate was slashed by 1,250 basis points (12.5 percentage points) between April and September of last year. In the past three months, almost half of that cut has been reversed, and the net change in this roller-coaster rise since Russia first invaded Ukraine has a rise of 450 basis points. A statement released today attributes the inflation to ruble weakness and an imbalance of demand and supply related to the war. “The Bank of Russia will consider the necessity of further key rate increase at its upcoming meetings.”

In other central banking developments, the People’s Bank of China left the one-year medium-term lending facility rate unchanged at 2.50%, and the board of directors at the Central Reserve Bank of Peru as expected cut its reference interest rate by 25 basis points to 7.50%. This reduction reverses the final hike of 25 basis points in a sequence of tightening from a starting point of 0.25% in August 2021 that ended at 7.75% in January 2023. Officials at BCRP were quick to disclaim today that “this decision does not necessarily imply a sequence
of interest rate reductions.” While projecting a continuing downtrend in year-on-year inflation, they warned of significant forecast risks related to climatic factors.

Other data of note reported around the world today include

  • A two-year low in New Zealand’s manufacturing purchasing managers index, which has now been below the 50 threshold between expansion and contraction for six straight months.
  • A 0.9% July rebound in Japan’s tertiary index of service sector activity after June’s 0.7% decline. The 2.7% on-year rise of the index was the most in ten months and compares to a 1.6% average advance in 2022.
  • Euroland’s seasonally adjusted trade surplus fell back to just EUR 2.9 billion in July from EUR 8.6 billion in June, as exports fell for a second straight time. The unadjusted January-July surplus of EUR 18.5 billion contrasts with a deficit of EUR 188 billion in the first seven months of 2022. The energy trade deficit dropped by EUR 104 billion, but global oil prices are rising again.
  • Indonesia’s $24.3 billion trade surplus in January-July was 30.3% smaller than a year earlier. Indonesia is an energy exporter.

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

Tags: , , ,


Comments are closed.