by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

Good morning!  Signals of higher rates from central banks are leading to a general risk off day.  Interest rates are higher, while equities are generally lower as are commodities.

In today’s Comment, we lead off with the central bank news.  Next up is PM Modi’s visit to Washington. President Biden’s most recent gaffe has upset China; we also note trade news related to China.  An update on the war in Ukraine comes next, and we close with a roundup of international news.

Central Banks:  There is a plethora of central bank news this morning.  Tightening monetary policy puts the global economy at risk.

• In response to higher U.K. inflation, the BOE raised rates 50 bps this morning, taking the bank’s policy rate to 5.00%, a 15-year high. A combination of factors has lifted inflation, including labor action, trade disruptions still lingering from Brexit, and the lack of immigration.  U.K. retailers are reporting a rise in shoplifting.  Shopkeepers believe that higher prices, which are causing a decline in living standards, are tempting shoppers to steal.
• Chair Powell travels to Capitol Hill again today, this time visiting the Senate. Yesterday, the head of the Federal Reserve Open Market Committee clearly signaled that the most recent pause in rates most likely didn’t indicate the end of the current tightening cycle.  Even the Fed’s most “lonesome dove,” Chicago FRB President Goolsbee, is uncertain about the direction of the next move; he isn’t calling for rate cuts.  In response to the hawkish tone, the yield curve inverted sharply as long-duration Treasuries tend to rally on hopes the Fed will corral inflation.
• Meanwhile, the Senate appears close to approving the White House selections for Fed governors. Governor Jefferson is up for vice-chair, Governor Cook is up for a full 14-year term, and Adriana Kugler will fill the last open seat on the committee.
• Turkey, facing a serious inflation problem, nearly doubled its policy rate to 15% from 8.5%. The country’s president has argued that raising interest rates causes inflation but in the wake of his reelection, he seems to be adopting a more orthodox policy stance.  Despite the move, the markets wanted more; the TRY fell on the news.
• Norway and Switzerland also raised policy rates today.

 Modi to Washington:  Over the years, the U.S. has had mixed relations with India.  During the Cold War, India was a key member of the non-aligned movement, which attempted to avoid taking sides in the global division.  That policy continued after the Cold War ended.  India has been a major buyer of Soviet/Russian defense material and has benefited greatly by purchasing Russia oil at deep discounts.  Washington has been troubled by India’s treatment of minority groups.  Still, as U.S. relations with China deteriorate (see below), Washington has been attempting to woo India into a bloc designed to isolate China.  As part of that effort, PM Modi is in Washington for a state visit with full honors.  We note that the U.S. is offering to sell India defense goods in a bid to improve relations and perhaps wean New Delhi off Russian military equipment.

 Oops, I Did It Again:  After SoS Blinken traveled to China in an attempt to stabilize relations, President Biden triggered a row after calling President Xi a “dictator.”  Chinese officials were not amused by the comment, and the gaffe sent U.S. officials scrambling to respond.  It’s unclear if the comment will cause lasting damage, but the timing does thwart recent efforts to improve relations.

China and trade:  German Chancellor Scholz and Chinese Premier Li held meetings in Berlin this week where the chancellor pressed China for a “level playing field.”  Germany is heavily dependent on the Chinese economy and Scholz is considered a dove on China.  Meanwhile, the EU appears to be tightening trade and investment policy toward China in actions resembling American policy.  China’s “dual circulation” economic policy is designed to reduce China’s global dependence while simultaneously increasing the world’s dependence on China.  The WSJ points out that the U.S. has avoided trade deals as a way to counter China, the most obvious being the Trans-Pacific Partnership.  The U.S. position is that trade deals have tended to boost China’s global integration, something that Washington is trying to weaken.

 Ukraine Update:  The Ukraine counteroffensive continues to grind on.

• Although the conflict continues, policymakers are starting to discuss the rebuilding of Ukraine after the war ends. EU officials are considering seizing frozen Russian foreign reserves, which could bring up to $200 billion.  The action is probably illegal under international law, but making Russia pay for damages caused by the war is tempting.
• Ukrainian missiles have apparently damaged a key bridge supplying Russian troops in the Kherson region.
• Although the Russian president’s domestic political situation appears to be secure, he has faced consistent criticism from the political right wing in Russia. A Russian commentator suggested that China should send a couple of million troops from the PLA to assist Russia in the war in Ukraine.  Although that isn’t likely to happen, the comment inadvertently highlights one of the fallouts from the war, which is Russia’s increasing dependence on China.
• National Security Advisor Sullivan will travel to Denmark this weekend to meet with representatives from nations in the Global South that have remained neutral in the conflict in a bid to sway them to support Ukraine. It is unclear if Sullivan will change minds but getting support from these holdouts would be a PR win.

International Roundup:  Here are other news items of note.

• Brazil’s former president is in court and facing a potential eight-year ban from political office on charges that he abused his presidential powers in recent elections.
• French police have raided the headquarters for the 2024 Olympics in a corruption probe.
• Moldova, which has been trying to fend off Russian pressure, has banned the pro-Russian Shor party.

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