Dollar Strengthens Marginally Further
October 27, 2023
A statement from the Central Bank of Chile justifying a smaller interest rate reduction after today’s scheduled meeting ties a nice bow around the interconnection of the surprisingly resilient U.S. economy, the hawkish Fed stance, geopolitical danger, elevated long-term interest rates, dollar appreciation, and the vulnerability of share prices and developing country currencies.
The main development has been the tightening and volatility of global financial conditions, associated with, among other factors, the dynamic performance of the U.S. economy —with the repercussions on the future evolution of its inflation— and a scenario of incipient doubts about the country’s fiscal evolution. To the latter, the uncertainty surrounding geopolitical conditions has been added. In this context, the U.S. long-term interest rates have risen significantly, which has spread to all other economies. The Federal Reserve has reinforced its message of prolonged monetary tightening, without ruling out further hikes in the fed funds rate. This combination of factors has resulted in a global appreciation of the dollar and negative corrections in stock markets. The recent escalation of global geopolitical risks, along with the announcements of OPEC+ production cuts, has led to greater volatility in the price of oil, which traded around US$87 per barrel in the days prior to this meeting. The copper price fell to US$3.6 per pound, in line with the global appreciation of the dollar.
In overnight financial market action up to shortly before the release of U.S. personal income, spending and the PCE price deflator resulted in a dollar gains of 0.3% against the euro and Swiss franc and 0.2% versus sterling and in the DXY weighted dollar index. The yen, up 0.2%, did better than keeping up with the U.S. currency. Ten-year sovereign debt yields had dipped 2 basis points in the U.K., 2 bps in France and 1 bp in Germany but risen by three basis points in the United States. Share prices recovered 2.1% in Hong Kong, 1.3% in Japan and 1.0% in China and India but have alternatively dropped so far by 1.2% in France and Israel and by 0.7% in Russia and Turkey. U.S. equity futures were marginally softer, while the price of oil had jumped 1.5%.
Officials at the Central Bank of Chile had cut their interest rate twice earlier by 100 basis points in July and 75 bps in September from a peak of 11.25% reached in October 2022. Today’s unanimously decided rate reduction was by only 50 basis points to 9.0%, well above the pandemic low of 0.50% maintained from March 2020 until July 2021. At 9.0%, the new interest rate level remains considerably above the 25-month CPI inflation low of 5.1% last month.
Policymakers at the Central Bank of Russia also delivered a more hawkish rate announcement today than analysts were anticipating. Their interest rate was lifted to 15% from 13%, double the increment that had been forecast. Conceding that recent inflation (an 8-month high of 6.0%) had exceeded their expectations and been accompanied by indications of elevated inflation expectations, officials affirmed a need for a tight monetary stance being retained for an additional prolonged span. Even then, they do not foresee inflation dropping to 4% until late 2025.
Overseas data reported this Friday show
- A two-month high of 2.7% in core Tokyo CPI inflation that excludes fresh food for the month of October. Energy leaped 7.9% on month but fell 14.1% on year. Inflation excluding energy as well as perishable food printed at 3.8% in the latest month, almost twice the Bank of Japan’s target.
- Australian producer prices leaped 1.8% on quarter in 3Q 2023, resulting in a greater-than-expected 3.8% year-on-year increase.
- In Singapore, producer prices followed a 4.0% monthly advance in August with a 1.6% September rise. On-year PPI deflation their has imploded from a 91-month low of -15.3% in May to just -0.4%.
- Irish consumer price inflation slowed to 3.6% in October from 5.0% in September and a record 9.6% in mid-2022.
- Business sentiment among Italian manufacturers fell to a 38-month low in October. Italian consumer confidence fell in the month as well, reaching a 9-month low.
- French consumer confidence printed at 84 in October, right in the middle of the narrow 82-85 corridor of readings during the first nine months of 2023.
- In Nordic Europe, retail sales in September compared to year-earlier levels dropped 3.8% in Sweden, fell 2.5% in Norway but rose 1.3% in Denmark (the first increase since June and the largest one in 19 months).
- Although Austria’s manufacturing purchasing managers index in October rose to a half-year high, the reading of 41.7 was substantially south of the 50 threshold, conveying a quite steep contraction in activity.
- Spanish real GDP rose 0.3% on quarter and 1.8% on year in the third quarter, slightly better than expected.
- Irish GDP fell 1.8% on quarter and 4.7% on year in 3Q, representing the largest 12-month drop in 14 years.
The U.S. personal income and spending report has reinforced the picture of relentless household spending that was conveyed in yesterday’s released national income accounts that included an astounding 4.0% upsurge in the personal consumption component last quarter. Today’s addendum covering the month of September documents a 0.7% monthly increase in personal consumption expenditures, which a averaged 0.5% per month over the three prior months. Inflation-adjusted personal consumption growth accelerated from 0.1% in August to 0.4% in September, enabled by a drop in the savings rate from 4.0% to just 3.4%. Fed officials look at several inflation measures, but the personal consumption price deflator is the one in whose representative accuracy and usefulness as a forecasting tool they hold the most confidence. Such jumped 0.4% on month and 3.4% on year, and the core PCE price deflator (+0.3% on month and 3.7% on year) also argue in favor of future policy vigilance. The FOMC’s interest rate decision at next Wednesday’s meeting could be a close one.
Copyright 2023, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Australia CPI, Bank of Russia, Central Bank of Chile, U.S. personal consumption and PCE price deflator
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