Guessing Games Grip Investors
October 10, 2023
Once upon a time, central bankers felt free to change policy at any time, and even after pre-scheduled meetings, some like the Federal Reserve disclosed policy decisions only after a very extensive time lapse. But as theories about price inflation have evolved, the role of expected inflation as a major determinant of future inflation has moved to the forefront, and that in turn has persuaded central bankers to become transparent to a fault in communicating their actions, both as they happen and the various nuances in their thinking about what they are likely to do in the future. Rhetoric plays a central role. The FOMC meets only eight times a year, and in an effort not to spring surprises, officials treat the once-common option of intra-meeting interest rate changes as a last resort. To fill in the space between meetings, numerous public pronouncements by Fed officials in effect provide the financial community with a steady stream of consciousness, and this lends a choppy dimension to market play.
U.S. economic data last month and culminating last week with a much greater-than-forecast rise in jobs. Fed officials conceded that inflation had dropped more quickly than expected but also expressed concern that a continuing hot labor market, the renewed rise of oil prices, and myriad uncertainties might prevent a return to the medium-term inflation target of 2% as quickly as deemed necessary and that monetary restraint might need to be augmented further and, more importantly, introduced the new view that any subsequent reduction of the federal funds target rate would commence later and be much more gradual than signaled previously. In response, bond and equity markets fell. It did not take long, however, for several Fed officials to tweak their message again, introducing the possibility that another hike may not be needed after all because higher market interest rates may have accomplished as much additional tightening of monetary conditions was would be needed. In this back-and-forth two-way dynamic of cause-and-effect between policymakers and financial market participants, the ball is now in the market’s court. Will long-term interest rates remain a currently higher levels or perhaps drift even higher? Or alternatively, will they settle back toward previous levels? Ultimately, what the Fed decides to do policy-wise will hinge on “labor market conditions, inflation pressures and inflation expectations, and financial and international developments,” and it will be a totality of information that intrinsically is seldom uniform in bias that will guide them.
Fed policy is not the only object the markets guessing games this morning. Investors are also trying to make sense of the Chinese government’s promise to stimulate growth more forcefully with both fiscal and monetary policy tools. The war between Israel and Hamas creates a whole other spectrum of uncertainties, and so do America’s ongoing political wars.
In the here and now, investors projected a more upbeat mood overnight. Equity markets are up 1.4-1.8% in Germany, France, Italy, Spain and the U.K.. Japan’s Nikkei rose 2.4% following a three-day weekend. Equities in India, Australia, and Singapore each closed 1.0% higher this Tuesday. The 10-year Treasury yield dropped back 11 basis points to 4.69%, but comparable German and British yields are 5 and 3 basis points more elevated. There’s been little net change from Monday in the prices for oil, gold or bitcoin. Likewise, overnight movements in the dollar have been narrow and mixed, with 0.2-0.4% gains against the Australian dollar, kiwi and Japanese yen, but also dips of 0.4% versus the ruble, 0.2% against the euro and 0.1% relative to the British pound.
The IMF released its quarterly World Economic Outlook today, with updated growth and price forecasts for 2023 and 2024 that depict tepid economic activity but excessive inflation. GDP this year is projected to rise in 2023 by 2.1% in the United States, 2.0% in Japan, 0.7% in Euroland, and 0.5% in Great Britain. These are higher than predicted in July’s WEO except in Japan’s instance. Likely Chinese growth for this year was also bumped higher to 5.0%. For 2024, the revisions of projected growth were mostly downward (1.5% in the U.S., 1.2% in Euroland, 1.0% in Japan, 0.6% in Great Britain, and 4.2% in China). Regarding consumer price inflation, the IMF projects 6.9% this year and 5.8% in 2024.
Economic data reported today around the world included inflation and industrial production for several countries.
A 0.2% year-on-year increase in Dutch consumer prices in September is the lowest in seven years and down from a 14.5% a year earlier, but core inflation of 4.6% was just 2.3 percentage points below the 6.9% record high in May 2023. Czech CPI inflation of 6.9% last month was at a 21-month low and down from a 357-month peak of 18.0% in September 2022. Danish consumer prices fell 0.7% in August and 0.3% in September, trimming their 12-month rate of increase to a 31-month low of 0.9% compared to 10.0% one year earlier. Greek CPI inflation of 1.6% in September represents a 26-month low and down from a 343-month high of 12.1% in June 2022. Egyptian CPI inflation accelerated additionally to a record high 38.0% last month and has exceeded 30.0% since February. Norway reported both consumer price and producer price figures. September’s 3.3% consumer price inflation rate is the lowest in 20 months but associated with higher 5.7% core inflation pace. Producer prices jumped 4.8% in September, resulting in a year-on-year decline of 29.3% after the record on-year drop of 37.8%.
Italian industrial production rose 0.2% in August and was 4.2% lower than a year earlier. Finnish industrial production climbed 2.1% on month and 1.0% on year. Turkish industrial production fell 0.8% on month and was 3.1% above the August 2022 level. Austrian industrial production posted the greatest on-year slide (-2.5%) in August. Greek industrial production was 0.5% below a year earlier.
Among other data reported today,
- Japan’s 2.28 trillion yen current account surplus 3.4% larger than a year earlier in August.
- Japan’s economy watchers index, a gauge of service sector worker sentiment, fell to an 8-month low in September. This was so for both current conditions and the perceived outlook.
- British same-store sales posted a 2.8% year-on-year increase last month.
- Small business sentiment in the United States fell to a 4-month low in September and, at 90.8, was not very far above April’s 123-month low.
Copyright 2023, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
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