Markets Came Away With a Positive Spin on Powell’s Press Conference
November 2, 2023
Equities rallied overnight on greater speculation that Fed officials might not raise interest rates again in this tightening cycle. Share prices on Thursday closed up 2.2% in Taiwan, 1.8% in South Korea, 1.7% in New Zealand, 1.6% in Indonesia, 1.1% in Japan, and 0.8% in India and Hong Kong. Today’s rises so far around major European markets range from 1.3% in the U.K. to 1.9% in France. Nasdaq futures are up 1.1%, but the reaction outside of tech has been less pronounced.
Fed Chairman Powell didn’t explicitly indicate that not further rate increase would be needed. He did say that FOMC members are carefully watching the endogenous advance of market rates, which is not entirely thought to reflect expectations of future additional Fed interest rate hikes and which has effectively continued the tightening of already restrictive monetary conditions. However, he stressed that it would be very important for the move higher in market rates to prove persistent. In that regard, the current 4.67% yield on the 10-year Treasury yield represents a 32-basis point slide from its close on October 19th, so today’s wave of optimism of investors may prove unwarranted.
A big decline in 10-year sovereign debt yields has occurred elsewhere today, amounting to 16 basis points in Italy and the U.K., 11 bps in France and Spain, 8 bps in Germany and 3 basis points in Japan.
The weighted DXY dollar index is 0.7% softer this morning. The dollar has lost 0.8% against the kiwi, 0.7% versus the Australian dollar, 0.6% vis-a-vis the euro and peso, 0.4% relative to the yen and loonie, and 0.3% against the Swiss franc and sterling. West Texas Intermediate oil has rebounded 1.5%, and the price of gold is 0.4% higher.
Like the Fed, central banks in the U.K., Norway, and Malaysia today left interest rates at current levels, while the Central bank of Brazil late yesterday announced its third 50-basis point cut since August.
The manufacturing purchasing manager indices from countries observing All Saints Day arrived today.
- Poland’s PMI rose 0.6 points to a 4-month high in October but at 44.5 remained well below the neutral threshold of 50.
- Hungary‘s PMI recovered 3.1 points to 50.5, its first reading above 50 since May.
- Spain‘s factory PMI tumbled 2.6 index points to a 12-month low of 45.1.
- Italy’s PMI fell 1.7 points to a 3-month low of 44.9.
- The French and German revised PMI readings were respectively 0.2 and 0.1 points above their preliminary October indications but very weak nonetheless at a 41-month low of 42.8 and a 5-month high of 40.8. Germany’s reading was the lowest among eight reporting members of the euro area, and Greece’s 50.8 score was the only one to exceed the 50 threshold.
- The collective Euroland manufacturing PMI in October was revised to 43.1 from 43.0 estimated earlier. That’s still a 3-month low. Manufacturing has been contracting since July 2022, and last month’s reading strongly suggests a continuing recession. The silver lining is that the PMI trend seems to be leveling off, creating the possibility of economic recovery starting by mid-2024. Another bright spot is that the labor market hasn’t been hit as hard as in previous recession.
Swiss consumer prices in October slid back to August levels, leaving on-year inflation unchanged from September’s 1.7% reading and only half as much as last August’s 29-year high. Core CPI ticked 0.2 percentage points above September’s 21-month low of 1.3%. Swiss consumer confidence this quarter weakened sharply to a one-year low of -40 from a reading of -27 in 3Q.
CPI inflation slowed to 3.5% last month in Cyprus from September’s 6-month high of 4.0% but remained well above July’s 28-month low of 1.5%.
Romanian producer price inflation has cratered to -0.4% from a record high in August 2022 of 55.0%.
Germany’s jobless rate increased 0.1 percentage point to a 28-month high of 5.8% last month.
New jobless insurance claims in the United States rose slightly last week to a 7-week high but still low 217k. Unit labor costs among non-farm workers fell 0.8% in the third quarter, reflecting a 4.7% leap in productivity. At 1.9%, the year-on-year rise of unit labor costs fell below 2.0% for the first time since cresting at 6.3% in the first quarter of 2022.
The Bank of England‘s Monetary Policy Committee left the base rate unchanged as expected at its current 15-year high of 5.25%. As at the prior policy review in September, the 6-3 decision was far from unanimous as members Greene, Haskel and Mann once again favored raising the rate to 5.50%. These dissenters from the majority asserted “real household incomes had continued to rise, and forward-looking indicators of output had remained positive. The labour market was still relatively tight, consistent with a rise in the medium-term equilibrium rate of unemployment and strong labour demand, and the pace of loosening had been slow. Measures of wage growth and services inflation had remained elevated.” The wait-and-see approach of the majority of committee members was justified by weakening British economic activity and the continuing fall of CPI inflation, now at 6.7% versus last year’s peak of 11.%. Even the majority is keeping its options for an even higher interest rate in the near term. They believe a rate cut is unlikely before the second half of 2024 and see the rate dropping only about a percentage point to 4.25% through end-2026.
The Central Bank of Malaysia‘s 3.0% interest rate benchmark since May was left unchanged. A 25-basis point rate hike then culminated 100 basis points of tightening during 2022 and brought the rate back to its pre-pandemic level of 1.75% maintained between July 2020 and May 2022. Consumer price inflation of 1.9% in September was its lowest in 30 months and down from a high of 4.7% in August 2022.
The Bank of Norway also made no change to its key interest rate, which has been 4.25% since a 25-basis point hike in September. That was the fifth increase this year, totaling 150 basis points and following 225 basis points of increase implemented between September 2021 and the end of 2022. It remains the expectation of Norwegian monetary officials that a rate hike next month is probable, but the final decision on that possibility will not be made until the next meeting. Today’s statement cites labor market tightness, krone weakness against other currencies, and high core CPI inflation in Norway of 5.7% in September versus the 3.3% total inflation rate as reasons why the interest rate may need to climb further.
The Central Bank of Brazil‘s Selic interest rate crested at 13.75% from August 2022 to August 2023 when an initial 50-basis point reduction was undertaken. During the pandemic the rate had been as low as 2.0% from August 2020 to March 2021. Following September’s second rate cut, today’s 50-basis point cut leaves the rate at 12.25%, still well above the 5.2% rate of inflation. CPI inflation crested at 12.13% in April 2022, but monetary officials have a goal of 3.0% that is not likely to be sustained until after 2025. More interest rate reductions will be coming, but officials want the process to be done carefully as there are upside as well as downside price risks.
Copyright 2023, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Bangko Negara Malaysia, Bank of England, Bank of Norway, Central Bank of Brazil, Euroland manufacturing PMI
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