Divergent Interest Rate Decisions, Geopolitical Concerns, and Higher U.S. PPI Inflation Than Forecast
December 12, 2024
Central bank interest rates have been hiked by 100 basis points in Brazil and 50 bps in Ukraine but were also cut today by 50 bps in Switzerland and 25 bps in Euroland.
The threats of coming tariff hikes and other sharp diversions in long-established U.S. policies have other economies around the world on edge. Investors are also uncertain about the extent and effectiveness of Chinese policy efforts to meet growth targets and closely watching developments in the Middle East in the wake of the sudden fall of Syria’s authoritarian rule.
A 0.4% monthly rise in U.S. producer prices last month was twice what analysts were predicting due to pressures on food and trade-related items, but a 0.2% rise in core was in line with forecasts. The monthly uptick when excluding trade as well as food and energy was just 0.1%. On-year inflation measures of total PPI and when excluding food and energy climbed to 21-month highs of 3.0% and 3.4%, respectively, while the index that excludes food, energy and trade only matched October’s 3.5% reading.
Vital U.S. financial indicators were hardly affected by the PPI report, as a likely Fed interest rate cut next week remains the majority view. Supporting this consensus, new U.S. jobless insurance claims last week rose to an 8-week peak of 242k.
- The 10-year Treasury yield ticked up on 1 basis point.
- Major U.S. stock market barometers have hardly moved.
- The dollar has strengthened 0.5% against the Swiss franc, 0.4% versus sterling, 0.3% relative to the Mexican peso, and 0.1% vis-a-vis the euro, Canadian dollar, and Chinese yuan. Alternatively, the dollar fell 0.3% overnight against the Aussie dollar and Japanese yen.
In other financial market highlights this Thursday, ten-year sovereign debt yields jumped ten basis points in Italy, seven bps in Spain, six bps in France, and five basis points in Germany. Tariphobia depressed WTI oil and Comex gold prices by 1.4% and 1.9% but helped lift the cost of Bitcoin by 1.2% and back close to its all-time peak of $103,647 touched one week ago.
Volatile swings continued in stock markets around the Pacific Rim, with losses of 0.9% in Indonesia and 0.3% in both Australia and India but gains of 1.2% in Japan and Hong Kong, 1.6% in South Korea, and 0.9% in China. European exchanges show scant change.
The Central Bank of Brazil’s Selic interest rate was lifted by a greater-than-predicted full percentage point to a one-year high of 12.25%. This more forceful move than previous interest rates totaling 75 bps in September and November, according to a released statement from officials was necessitated by a backdrop of “additional de-anchoring of inflation expectations, an increase of inflation projections, a stronger than expected economic activity, and further widening of the output gap. the Committee anticipates further adjustments of the same magnitude in the next two meetings, if the scenario evolves as expected.” Brazilian CPI inflation has risen to a 14-month high of 4.87%, compared to 3.2% last April and a 3% target.
Ukraine’s inflation acceleration has been even steeper, climbing from 3.2% last April to 11.2% last month. Accordingly, the National Bank of Ukraine today raised its key interest rate to 13.5% from 13.0%, which had been maintained previously since a cut in July 2023. In addition to inflation that far exceeds the central bank target of 5%, tighter monetary policy was also deemed necessary in order to sustain the functionality of Ukraine’s foreign exchange market.
A 25-basis point cut in Euroland’s key interest rates including the deposit rate to 3.0% had been widely expected by investors. The European Central Bank statement includes updated macroeconomic forecasts that lower projected GDP growth to 0.7% this year and 1.1% next year as well as total projected CPI inflation to 2.4% in 2024 and 2.1% in 2025. Today’s move was the fourth 25-bp reduction since June and was deemed appropriate in light of “the updated assessment of the inflation outlook, the dynamics of underlying inflation and the greater strength of monetary policy transmission.”
A halving of the Swiss National Bank’s key interest rate to 0.5% today was the largest rate cut there since 50-bp cut in January 2015. In taking this action, officials repeated their warning to intervene directly in foreign exchange markets against franc overvaluation when and as deemed necessary. The revised projected future path of CPI inflation lies somewhat lower than forecasts made in September for the period through the third quarter of 2025 and projects year-average inflation rates below 1.0% in both 2025 and 2026. The statement ends with the caveat that “the forecast for Switzerland, as for the global economy, is subject to significant uncertainty. Developments abroad represent the main risk.”
Global uncertainties featured prominently in today’s decision by officials at the National Bank of Serbia to keep their key interest rate on hold at 5.75% following three 25-basis point cuts from June through September. This was done even though CPI inflation of 4.3% remains with the bank’s target range of 1.5-4.5%.
In other economic news this Thursday,
Australia’s jobless rate fell 0.2 percentage points to an 8-month low of 3.9% in November and was accompanied by a larger-than-anticipated 35.6k increase in jobs.
Consumer price inflation in India settled back to 5.5% last month from October’s 14-month high of 6.2%.
South African producer price inflation (-0.1%) stayed below zero percent last month after a 15-year low of -0.7% in October.
The German current account surplus plunged to a 17-month low of EUR 12.5 billion in October from EUR 21.3 billion in September and EUR 18.7 billion in October 2023.
Copyright 2024, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Central Bank of Brazil, European Central Bank, National Bank of Serbia, National Bank of Ukraine, Swiss National Bank, U.S. PPI and jobless insurance claims
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