Contrary to the expectations of many, the transition to a global monetary easing cycle is being delayed as inflation remains a concern among central banks. From Bloomberg yesterday:
The world's central banks are halting interest rate cuts as inflation picks up from Indonesia to Canada.
The Bank of Canada today unexpectedly kept its benchmark rate unchanged after four straight reductions. Federal Reserve Chairman Ben S. Bernanke yesterday said he'll "strongly resist" any surge in inflation expectations, while European Central Bank President Jean-Claude Trichet reiterated he may raise rates as soon as next month...
Vietnam today raised its rate to the highest in Asia. Brazil, the Philippines and Indonesia also lifted borrowing costs this month. Chile's central bank raised its benchmark lending rate half a percentage point late today, more than expected, to help contain the fastest inflation since 1994.
China had also announced tightening measures over the weekend, measures that made themselves felt yesterday when its stock markets reopened. From Bloomberg:
China's stocks plunged 8.1 percent, the most since February 2007, after the central bank ordered lenders to set aside record reserves to curb credit growth and inflation.
More than half of the benchmark stock measure's 300 members slumped by the 10 percent daily limit, dragging the CSI 300 Index 45 percent below its Oct. 16 record. The gauge fell 282.94 points to 3,206.56 in Shanghai, its lowest close since April 19, 2007. Shares resumed trading after a holiday yesterday.
Industrial & Commercial Bank of China Ltd. led banks lower after the central bank said June 7 it will raise the reserve ratio for the fifth time this year by a full percentage point, withdrawing about $61 billion from the financial system. China Vanke Co. dropped on concern institutions will curb loans to developers and home buyers. Air China Ltd. fell on concern surging oil prices will increase fuel costs.
Treasuries are also being hit by the concerns about rising interest rates. Again from Bloomberg:
Treasury two-year notes posted their biggest back-to-back decline in at least 20 years after Federal Reserve Chairman Ben S. Bernanke pledged to "strongly resist" any deterioration of the public's confidence in stable prices.
Demand for U.S. government debt fell after Bernanke said late yesterday that the risk of a "substantial downturn" in the U.S. economy has diminished. Traders now see an 88 percent probability policy makers will raise interest rates by at least a quarter-percentage point in September, futures show. A week ago, the odds were 19 percent amid concern that mounting losses in credit markets would keep the economy from rebounding...
The benchmark two-year note's yield climbed 21 basis points to 2.91 percent at 5:34 p.m. in New York, according to BGCantor Market Data. It touched 2.95 percent, the highest since it reached 3.10 percent on Jan. 2 and up from the low this year of 1.24 percent on March 17... The 10-year note's yield gained 10 basis points, or 0.10 percentage point, to 4.10 percent.
Unlike his predecessor Alan Greenspan, Bernanke has less room for manoeuvre on interest rates. Persistent inflation is forcing him to pause on monetary easing well before the uncertainty over the economy is dissipated.
Not surprisingly, markets are not taking this well.
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