While I wrote this yesterday morning, “in the very short term we are getting very oversold and maybe today creates a tradeable bounce,” and one we got, I have no feel on what happens in the short term from here. If you were buying the dip because you felt the Fed and maybe the ECB were going to use Russian’s invasion as reason to go slow on tightening, Fed governor Chris Waller doesn’t agree.
He said late yesterday, “My preference is to increase the target range by 100 bps by the middle of the year.” Remember it was also Bullard, a voting member, who said that was his goal by July 1st. Waller would achieve that with 4 hikes at the next 4 meetings but also said “a strong case can be made for a 50 bps hike in March” if the February CPI data runs hot.
Philip Lane, the ECB chief economist and an uber dove, is quantifying today his estimate of the economic impact to the Eurozone of the invasion and he puts it at .3-4% for 2022. The stagflation that is now here makes their job even more difficult as it will for the Fed and all other central banks.
While tightening will be taking place this year, will the Fed and ECB favor the stag or flation when push comes to shove? You can be sure it will initially be the stag they are most worried about. I believe instead that you can’t improve the stag unless you control the flation.
If I’m right, it’s more reason to own some gold and silver in one’s portfolio.
With respect to pricing, what is not in people’s forecasts is the spurt higher in energy costs as that will trigger another round of price increases. For example, today the CEO of BASF, the world’s largest chemical company said “We will implement further substantial price increases in the coming months to pass on the significantly higher costs and improve our margins in the downstream businesses.” Their products cover the industries ag, chemicals, auto/transportation, construction, electronics/electric and energy so these price increases will filter into many end markets.
With the realization that sanctions won’t target commodity production and delivery, wheat, where about 1/3 of the world’s exports come from Russia and Ukraine, is giving back 3% of its 16% 3 day rally this week. We know the key commodities that these two countries produced have spiked, but the question is to what degree do we see delivery disruptions as ports around the Black Sea are blocked for export.
France said its February CPI jumped .8% m/o/m, which was above the estimate of up .5%. It was also up 4.1% y/o/y after a 3.3% print in January. There has not been an inflation read this high since this calculation began in 1997. Energy prices spiked by 21% y/o/y but for manufactured goods and services prices were still up 2.2% and should continue higher. This all by the way follows a 22% increase in PPI y/o/y in January.
Also out of Europe, but not reflecting the invasion, was the February Eurozone Economic Confidence Index which rose to 114 from 112.7. The forecast was 113.1. The flaming out of omicron was the main catalyst as the improvement was led by the services component which was up 4 pts. Retail too helped out. Manufacturing was little changed and inflation hurt consumer confidence. The euro is getting back some of what it lost yesterday and European sovereign bonds are modestly selling off.
So inflation is not just depressing consumer confidence in the Eurozone and what we’ve seen with the 10 yr low in US consumer confidence but last night we saw UK consumer confidence that fell to -26 from -19 and that was 8 pts worse than expected. That’s the weakest since 2021 and GFK said “There’s clear anxiety in these findings as many consumers worry about balancing the household books at the end of the month without going further into debt.” After spiking by 30 bps yesterday and by 50 bps this week through Thursday, the 5 yr inflation breakeven for the UK is down 16 bps today to 4.64%. The BoE has rates currently at .50%.
Headline CPI in Tokyo in February did reach 1%, double the pace of January and higher than the estimate of up .7%. We can blame higher food and energy prices for the upside. Taking out both saw prices fall by .6% y/o/y and again, mostly because of the 50%ish fall in cell phone fees which will cycle out in coming months. This has depressed inflation in Japan by about 150 bps. In response to the headline beat, the 10 yr inflation breakeven jumped by 6 bps to .64%, the highest since January 2016. The 10 yr JGB yield was up by 1 bp to .21% while the 40 yr was higher by 4.3 bps to .98%. The Bank of Japan can only stand by idly from doing nothing with policy for only so long when all of their peers are laying out a plan for tightening.