U.S. PPI and ECB Rate Announcement Fail To Clarify Confusion about Future Inflation and Central Bank Interest Rates
April 11, 2024
Central bankers have consistently sent a message that disinflation will be a bumpy process and that monetary policy normalization will hinge on growing confidence that inflation targets will be fully resecured. In other words, time and evolving information will dictate what is done. It is not apparent if inflation will meet these parameters without a more pronounced slowdown in economic activity, and it is also true that inflation over the next 1-2 years will be influenced by factors beyond the control of central banks as well as the level of interest rates and allowable money growth. The bumpiness of disinflation will be mirrored in continuing uncertainty surrounding monetary policies and investor responses.
Today’s two main events have been the release of U.S. producer price data on day after an unsettling CPI report and the European Central Bank’s policy statement. The PPI report was better than feared but not enough so to alleviate concern that the downtrend of inflation has stalled. The ECB as expected left its rates unchanged but also as expected confirmed that officials think that rate cuts may become appropriate later in 2024:
If the Governing Council’s updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission were to further increase its confidence that inflation is converging to the target in a sustained manner, it would be appropriate to reduce the current level of monetary policy restriction. In any event, the Governing Council will continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction, and it is not pre-committing to a particular rate path.
In overnight action, the dollar changed little, rising 0.2% against the euro and loonie and 0.1% versus sterling, holding steady relative to the Japanese yen, and falling 0.2% vis-a-vis the Swiss franc and by 0.1% against the Australian and New Zealand currencies. At 105.3, the weighted DXY dollar index is holding onto fairly firm ground.
A more telling and differentiated market response can be observed in sovereign debt yields, which currently show gains on the day of 10 basis points in Italy, 9 basis points in Japan, 7 bps in Great Britain, 6 bps in Spain, 5 bps in France, 4 bps in Germany and 3 bps in the United States.
Equity movements vary both by country and sector. Financials have struggled amid frustration that regardless of when first reductions are made the potential scope for lower interest rates this year clearly looks more constricted than it did a few months ago. The Nasdaq is marginally up, while the DOW has fallen 0.6%. In the Pacific Rim, stock markets closed down 0.4% in Japan and Australia but up 0.5% in Indonesia and 0.2% in China. Major European share price declines range from 0.4% in France to 1.4% in Spain.
Prices for Bitcoin and WTI oil are down by 1.4% and 0.9%, while gold has risen 0.6% further thus far today.
A 0.2% rise in the total U.S. PPI index during March was its smallest gain since a 0.1% dip in December, but year-on-year producer price inflation still jumped half a percentage point to an 11-month high of 2.1%. Gasoline was the main depressant on producer price inflation last month, but services again went up 0.3% on month, which is too high. PPI inflation of 2.4% excluding food and energy exceeded February’s reading of 2.1% and analyst expectations. Excluding trade as well as food and energy, PPI inflation also accelerated, reaching 2.8%. U.S. import and export prices will be reported tomorrow.
The ECB refinancing rate, like the Federal funds rate in the United States, has yet to be cut. Such has been at more than a 20-year high of 4.5% since a 25-basis point increase last September. Such culminated increases of 250 basis points in the second half of 2022 and 200 bps last year. The good news embodied in the ECB rate announcement is that “inflation has continued to fall, led by lower food and goods price inflation. Most measures of underlying inflation are easing, wage growth is gradually moderating, and firms are absorbing part of the rise in labor costs in their profits. But domestic price pressures are strong and are keeping services price inflation high.” All of such echoes what Fed officials were saying not long ago. The difference is that Euroland’s economy has been much weaker than America’s.
The National Bank of Serbia also reviewed monetary policy today, with officials deciding in the end to maintain the cyclical inflation rate high of 6.5%, which was attained last July and not changed since then. Serbia’s rate had been lifted by 400 basis points in the final nine months of 2022 and a further 150 bps in 2023. Reasons for not cutting the 6.5% rate yet despite CPI dropping in Serbia from a peak of 16.2% in March 2023 to 5.6% this past February were framed in a global context, namely “declining but still elevated global inflationary pressures” and “global uncertainty over energy and primary commodity prices.”
Among other data out this Thursday, new U.S. jobless claims settled back down to a 5-week low of 211k last week from 222k in the previous week. This left the 4-week moving average virtually unchanged and suggests that the labor market may still be too tight for compatibility with the Fed’s inflation target.
Consumer price inflation in Hungary slid to a 37-month low of 3.6% in March from 2.7% in February and a peak of 25.7% in January 2023.
Chinese consumer prices dived 1.0% on month in March, depressing the 12-month rate of increase to a mere 0.1% from 0.7% in February. Chinese producer prices meanwhile were 2.8% lower than in March 2023, their most negative point in 4 months.
Expected inflation in Australia climbed 0.3 percentage points to a 6-month high of 4.6% in April.
The monthly current account surplus of Germany averaged EUR 29.8 billion in January-February, up from EUR 22.4 billion per month in the second half of 2023.
Italian industrial production underwhelmed expectations in February, inching up 0.1% on month and falling 3.1% on year.
South African factory output and Mexican industrial production fell 0.3% and 0.1% in February but posted 12-month increases of 4.1% and 3.3%, respectively.
And an 8.2% year-on-year increase in Brazilian retail sales during February was the most in 33 months.
Copyright 2024, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: European Central Bank, German current account, National Bank of Serbia, U.S. PPI