Central Banks Moderate Rate Hikes – Global Slowdown in View
Retreating inflation and relatively moderate interest rate increases from the Bank of England (BoE), Federal Reserve and European Central Bank (ECB) have shifted market attention from high prices to the possibility of a global slowdown.
China’s Industrial Production figures for November showed a distinct downturn. On an annual basis, industrial output fell from 5 percent in November 2021 to 2.2 percent in the same month this year. China’s caution on COVID-19 kept industrial centers under lock and key for much of the year and the country has only just begun to exit from its zero-tolerance coronavirus policy. After relying heavily on lockdowns to manage the spread of COVID-19, the policy change has resulted in a surge in new COVID cases that are weighing on economic activity - as was seen in other countries that opened earlier in the year.
Of significance to European and US luxury retailers who market their products to the 1.4 billion consumers in China, retail sales in the Asian giant declined from minus 0.5 percent in November last year to minus 5.9 percent in the same month this year. Considering that retail sales were expected at minus 3.7 percent, the weakness is likely to impact on the bottom line for the luxury retail sector which will have to wait longer until demand in China recovers.
Insights into the effects of subdued retail sales in China are likely to feed into purchasing manager indexes (PMI) in France, UK, Italy and Germany, all of which produce luxury clothing, accessories and cars. France’s S&P Global Flash Manufacturing PMI for December is in risky territory at 48.9 - anything under 50 indicates a contraction. Similarly, Germany’s Flash PMI for December came in at 47.4.
Taking the headwinds into account, it’s still counted as a bright spot that China will gradually return to normal and in the medium term, growth rates could start picking up.
Market news in the week before Christmas
Germany’s Ifo Business Climate report for December is out on Monday and is a key indicator to watch because the last reading was less pessimistic, coming in at a 3-month high of 86.3 for November. If the business climate declined significantly from November to December, it could be a warning sign for exports and supply bottlenecks. Already, less than half of the companies surveyed want to raise prices in the next three months, marking a drop from previous reports in Q4. The consensus for December’s Ifo survey is seen at 87.4.
In other trading news, the Reserve Bank of Australia will release its Meeting Minutes on Tuesday, providing further insight into the central bank’s outlook on interest rates. One of Australia’s primary export markets is Japan, where the interest rate policy diverges considerably with likely impacts on the balance of trade and foreign exchange.
“In my view, concern about a wage-spiral in Japan is far from warranted.” Speech by Nakamura Toyoaki Bank of Japan Member of the Policy Board, December 7, 2022.
The Bank of Japan focuses on long-term inflation expectations and sees prices in the services sector as changing more slowly than on imported and locally manufactured goods. The central bank is expected to maintain ultra-low interest rates at the level of minus 0.1 percent, continuing the divergence with trading partner Australia. If there are any surprises in the BoJ’s decision, there might be an impact on JPY currency crosses.
Another global central bank decision will be foreshadowed on Wednesday, when Canada’s inflation rate for November is expected. Price growth is seen at the level of 6.8 percent compared with 6.9 percent in October. If inflation rose unexpectedly, the Bank of Canada might decide on a more hawkish stance in January. By the same token, if inflation has dropped, the central bank might follow the less hawkish approach of the Federal Reserve, ECB and BoE.
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