Data and Central Bank Meetings Both in Thursday’s Spotlight
January 25, 2024
The U.S. dollar has been generally steady, however, with overnight upticks of 0.3% against the Swiss franc and 0.1% relative to the euro but 0.1% downticks versus sterling and the Australian, New Zealand and Canadian dollars.
U.S. stock futures are also flat. Major continental stock markets are down 0.5-1.1%, pending the ECB rate announcement and Lagarde’s press conference. Share prices in China and Hong Kong got a further boost of 2.6-3.0% from yesterday’s announced reserve ratio cut by the People’s Bank of China. The Japanese Nikkei closed unchanged, however.
Ten-year sovereign debt yields have risen 4 basis points in Italy, 3 bps in Spain, and 2 bps in Germany, France and Japan, but their U.S. counterpart is a basis point lower today as investors await U.S. fourth quarter GDP figures due shortly.
Mid-morning yesterday came the expected Bank of Canada announcement of an unchanged overnight interest rate of 5.0%, but new information was conveyed by the released statement’s deletion of the phrase that officials remaining prepared to raise the policy rate further if needed. This small change in language picks up on the Fed’s previous signal that monetary policy restraint has moved into a new stage of asking not how high rates need to go but rather how long the current restraint should be maintained and how quick or measured the eventual decline in central bank rates can proceed.
Central banks today in Ukraine, Norway and Turkey today sent a similar message that monetary policies now appear sufficiently restrictive, but officials at the Central Bank of Turkey did so only after a culminating rate hike to 45% from 42.5%. From a low of 8.5% as late as June 2023, TCMB officials has lifted their interest rate benchmark sharply to 25.0% by end-August and 42.5% by December. An inappropriately loose prior monetary policy had sent the lira tumbling and inflation soaring from 38.2% at mid-2023 all the way to 64.8% by yearend.
Taking into account the lagged impact of monetary tightening, the Committee assesses that the monetary tightness required to establish the disinflation course is achieved and that this level will be maintained as long as needed. The Committee assesses that the current level of the policy rate will be maintained until there is a significant decline in the underlying trend of monthly inflation and until inflation expectations converge to the projected forecast range of 5%.
The National Bank of Ukraine continues to contend with the unique uncertainties posed by its war with Russia. Its benchmark interest rate was yanked higher from 9.0% at the start of 2022 to 25.0% by midyear and kept at that level until an initial rate cut in July 2023. It was reduced during the second half of last year by 10 percentage points to 15.0%, but easing has now been paused even though CPI inflation of 5.1% in November and December is far below the 26.0% reading in January 2023 and hovering around the middle of the 4-6% target range. Economic activity is expanding again in Ukraine, and officials project a modest acceleration of price pressure this year before inflation settles back to 6% in 2025. Keeping the central bank rate at 15% will be necessary to maintain a stable hryvnia exchange rate and anchor inflation expectations. The forecast of “a slight reduction in the key policy rate starting in H2 2024” rests on the somewhat dubious assumption “that Ukraine will receive sufficient international financing and that security risks will subside from next year.”
The Bank of Norway‘s central bank rate had been as low as zero percent from May 2020 until September 2021, was 0.50% by the end of 2021, 2.75% by end 2022, and at 4.5% after a 25-basis point hike last month. After today’s policy review, officials dropped the signal that more restraint appears likely but also asserted that “business costs have increased considerably in recent years, and continued high wage growth and the krone depreciation through 2023 will likely restrain disinflation. Consequently, there will likely be a need to maintain a tight monetary policy stance for some time ahead. Further out, when inflation falls back and economic conditions so warrant, the Committee can start lowering the policy rate.”
The European Central Bank Governing Council also kept its interest rate structure and mechanisms for reducing the balance sheet unchanged. This decision had been expected, and it comes as no surprise either that the timing for an eventual easing path was left unspecific and ultimately data-dependent. The ECB refinancing rate had been lifted from zero percent in mid-2022 to 2.5% at end-2022 and its current 4.5% after last September’s policy review. Euroland has been experiencing recession. “The declining trend in underlying inflation has continued, and the past interest rate increases keep being transmitted forcefully into financing conditions.” But more time is needed to be sure that a full return to in-target inflation has been achieved sustainably.
The IFO Institute’s monthly German business climate index released earlier today printed at a weaker-than-expected 13-month low of 85.2, just a whisker above the October 2022 29-month low. This month saw business expectations for the economy over coming months slide 0.7 points to a 4-month low and perceptions of current conditions deteriorate even more sharply to a 43-month trough. Only manufacturers were less pessimistic. The service, construction and trade sector indices conveyed deepening gloom.
French business confidence improved overall in January but stayed below its long-term mean. Manufacturing and the overall employment scene worsened to 2- and 33-month lows, however.
The British distributive trades index plunged in January to a 2-year low reading of -50 from -32 in December and -11 in November. This was the ninth sub-zero reading in a row, a stark contrast to the post-pandemic high of +60 in August 2021.
Turkish business confidence rebounded from December’s year-long low of 99.1 to a reading of 100.9 this month but was still far weaker than the 111-month high of 114.8 set in July 2021.
Belgian business sentiment fell back to a three-month low this month.
South Korean business sentiment ticked one point higher to a 6-month high in January.
In contrast to these weak reports, the first early estimate of U.S. GDP growth last quarter (+3.3% annualizd versus 3Q and 3.1% versus the final quarter of 2022) was well above expectations. The composition of growth was solid: personal consumption up 2.8%, an export/import growth ratio of 6.3% to 1.9%, non-residential business investment 1.9%, government spending +3.3%, and no sign of excessive or unwelcome inventory accumulation. GDP growth accelerated from 1.9% for full-2022 to 2.5% in 2023, and the PCE price deflation fell back from 6.5% on average in 2022 to 3.7% in 2023.
Among other U.S. data reported this morning, a 25k rebound in new jobless insurance claims didn’t prevent a further decline in their 4-week average to 202.75k. The early estimate of the goods trade balance showed a 3-month low of $85.46 billion in the deficit. The Chicago Fed National Activity Index slid to -.15 last month from +0.01 in November but was still well above October’s -0.66 reading. The main blemish involved durable goods orders, which being flat easily under-performed analyst forecasts.
Producer prices in December compared to a year earlier, fell 6.3% in Spain (the least in 8 month) and 7.7% in Sweden (the most ever). In South Africa, producer prices slid 0.6% on month and rose by the least (4.0%) in five months on a year-on-year basis.
Copyright 2023, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Bank of Canada, Bank of Norway, Central Bank of Turkey, French business confidence, German business climate index, National Bank of Ukraine, U.S. GDP growth
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