Another Bad Day for Stocks.. House of Representatives Ends Speaker Impasse.. And Rate Hikes in Turkey and The Philippines
October 26, 2023
Disappointing third-quarter corporate earnings have been the driving force behind the drop in share prices. Stock markets in the Pacific Rim closed down 2.7% in South Korea, 2.1% in Japan, 1.8% in Indonesia, 1.7% in Taiwan, and 1.4% in India. Share prices have lost 0.8% to 1.4% so far in Germany, France, Italy and Great Britain, and the Nasdaq has fallen 1.0% in futures trading.
Additional 1-2 basis point increases in ten-year sovereign debt yields have been tempered, by comparison.
The dollar remains well bid, rising on a weighted basis to a 3-week high and advancing 0.3% against the euro, 0.2% versus the Swiss franc and sterling, and 0.1% vis-a-vis the Japanese yen, and Canadian, Aussie and New Zealand dollars.
The glaring vacancy of a U.S. Speaker of the House over these past three weeks has ended. Known for his strongly evangelical Christian views and his out-spoken denial of President Biden’s election victory in 2020, Mike Johnson was supported by all the Republicans but got no approval votes from any Democrats. Johnson represents Louisiana’s fourth congressional district and only entered Congress in February 2015. As Speaker, he is third in line to the presidency.
The price of bitcoin tokens suffered a 1.1% setback, and that of West Texas Intermediate oil slumped back 2.0%.
As expected, the European Central Bank Governing Council ended a string of uninterrupted interest rate hikes that began 15 months ago. Lows in the deposit rate, refinancing rate, and marginal lending facility rate of -.050%, 0.0%, and 0.25% had prevailed from September 2019 to July 2022, and these rates now stand at 4.00%, 4.50% and 4.75%. CPI inflation in the euro area dropped to a 23-month low of 4.3% in September from 9.9% a year earlier. While current central bank rates are now deemed appropriate to keep inflation on a downward path to its medium-term target, the data-dependent policy will respond if the inflation outlook deteriorates. Even without raising rates continually, the policy stance is progressively tightening as the principal of maturing APP securities are no long being reinvested. A released statement explains,
Inflation is still expected to stay too high for too long, and domestic price pressures remain strong. At the same time, inflation dropped markedly in September, including due to strong base effects, and most measures of underlying inflation have continued to ease. The Governing Council’s past interest rate increases continue to be transmitted forcefully into financing conditions. This is increasingly dampening demand and thereby helps push down inflation.
In other central banking developments this Thursday, the Central Bank of Turkey’s one-week repo rate was raised today by the as-expected increment of five full percentage points to 35.0%. This matches the size of September’s rate hike and brings the cumulative tightening since June to 26.5 percentage points. This increase represents a dramatic about-face from 550 basis points of easing between August 2022 and February 2023. Turkey continues to experience a vicious cycle of reinforcing lira depreciation and domestic inflation. The dollar has strengthened 50.5% against the lira since the start of 2023, and Turkish consumer price inflation accelerated from 38.2% in June to 61.5% in September. According to a released statement,
The strong course of domestic demand, the stickiness of services inflation, and the deterioration in inflation expectations continue to put upward pressure on inflation. Geopolitical developments pose risks to the inflation outlook due to oil prices. The policy rate will be determined in a way that will create monetary and financial conditions necessary to ensure a decline in the underlying trend of inflation and to reach the 5 percent inflation target in the medium term. Monetary tightening will be further strengthened as much as needed in a timely and gradual manner until a significant improvement in inflation outlook is achieved.
Unlike the Turkish case, a 25-basis point hike of the reverse repo rate at the Central Bank of the Philippines had not been expected by analysts today. The move ends a pause since March and lifts the rate benchmark to 6.5% from 5.5% at end-2022 and a pandemic low of 2.0% that had been maintained from November 2020 to May 2022. A press release from the bank’s Monetary Board recognizes “the need for this urgent monetary action to prevent supply-side price pressures from inducing additional second-round effects and further dislodging inflation expectations.” The action followed a backing-up of CPI inflation from 4.7% in July to a 4-month high of 6.1% last month.
Mid-morning yesterday, the Bank of Canada confirmed expectations that its overnight interest rate was being left at 5.0%. The rate had been raised three times between January and July, each time by 25 basis points, and than came on top of four percentage points of increase between March and December of 2022. The Bank of Canada’s statement, however, did not close the door on possible future interest rate hikes, observing that inflationary risks had risen: “Near-term inflation expectations and corporate pricing behavior are normalizing only gradually, and wages are still growing around 4% to 5%. The Bank’s preferred measures of core inflation show little downward momentum.” Balance sheet normalization is another avenue that hopefully will keep inflation on a track to 2.5% a year from now and 2.1% by late 2025.
Prior to the release of several U.S. statistics, data from abroad informed investors that
- Japanese corporate service price inflation in September matched August’s 11-month high of 2.1%.
- South Korean GDP expanded 0.6% last quarter and by a 1-year higher in year-on-year terms to 1.4%.
- South African producer prices shot up 1.5% on month in September (most in 14 months) and 5.1% on year.
- The CBI index of British distributive trades unexpectedly sank 22 points in October to a 2023 low of -36.
- Spain’s jobless rate rose 0.2 percentage points to 11.8% last quarter versus 12.7% in 3Q22 and 16.3% in 3Q20.
The first glimpse of U.S. real GDP in the third quarter produced the strongest quarterly growth rate in seven quarters (4.9%), powered by a much larger-than-forecast 4.0% advance in personal consumption, expressed at an annualized rate. That was up from only +0.8% consumption growth in the second quarter and 55% of the rise in GDP. Government spending (+5.3%) and inventories were responsible for a combined 43% of GDP growth last quarter, while the movements in other elements of aggregate demand were inconsequential. On-year inflation measured by the personal consumption price deflator slowed to 3.4% in 3Q 2023 from 3.9% in 2Q, 5.0% in the first quarter and a crest of 6.8% in the second quarter of 2022. The underlying core PCE rate of year-on-year inflation dropped to 3.9% from 4.6% in the second quarter and a high of 5.5% in the first quarter of 2022.
Other U.S. data reported this Thursday showed
- A 10k rise in new jobless insurance claims to a still historically low 210k.
- A much bigger-than-anticipated 4.7% jump in durable goods orders last month, powered by aircraft.
- A more benign 0.6% monthly rise in non-defense ex-aircraft durable goods orders.
- A smaller-than-expected early estimate of the September goods trade deficit ($85.8 billion) after $84.6 in August.
- The smallest year-on-year decline in pending home sales (11%) since April 2022.
Copyright 2023, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Bank of Canada, Central Bank of The Philippines, Central Bank of Turkey, European Central Bank, U.S. GDP
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