FOMC and Overnight Data Put Markets in a Very Foul Mood

August 11, 2010

A fresh spike in risk aversion has depressed stocks, oil and sovereign bond yields and sent the dollar and yen higher.

Equities plunged 2.7% in Japan, 1.9% in Australia, 1.2% in Singapore, 1.3% in South Korea, 1.0% in Taiwan, 0.8% in India and Hong Kong, and 0.7% in Indonesia.  Europe is performing very badly, with stocks already off 2.0% in France and 1.8% in Germany and Great Britain.

Ten-year British gilt, German bund, and Japanese JGB yields have fallen by 10, 8, and 2 basis points.

Oil prices fell 1.2% and to less than $80 per barrel for the first time in August.  Gold edged 0.1% higher to $1199.1 per troy ounce.

The yen gained 0.4% against the dollar, which otherwise has appreciated 1.2% against the euro and Australian dollar, 1.1% relative to sterling, 1.0% against the kiwi, 0.6% versus the Canadian dollar and 0.5% against the Swiss franc.  The Chinese yuan is unchanged, and Chinese stocks firmed 0.6% even though released Chinese data are responsible in large part for the jump in risk aversion.

The environment for today was set by the FOMC, which downgraded its economic assessment and and arranged to ensure that its balance sheet not shrink as a result of maturing security holdings.  The U.S. stock market closed yesterday with a net loss.

Chinese data for July highlight weaker growth in money, bank lending, industrial production and retail sales but a 21-month high in CPI inflation.  Beijing officials continue to impose new regulations to cool bank lending and secure economic growth in single digits.

  • Consumer price inflation accelerated to 3.3% from 2.9% in June, 1.5% last January and minus 0.8% in September 2009.
  • PPI inflation of 4.8% was down from 6.4% in June and a peak of 7.1% in May but 11.8 percentage points above minus 7.0% last September.
  • Industrial production growth slowed to 13.4% from 13.7% in June, 18.1% in March and 19.2% last November.
  • Retail sales decelerated to a 12-month increase of 17.9%, a half percentage point less than forecast, from 18.3% in June and 22.1% last February.
  • Yuan lending of 533 billion last month was down from Yuan 630 billion in May and Yuan 774 billion.  This drop in particular rattled investor sentiment.
  • M2 money growth of 17.6% in the year to July was almost a percentage point less than forecast and down from 22.5% last March.
  • On-year fixed asset investment growth of 24.9% in January-July was down from 25.5% in the first half of 2010 and 30.5% in full-2009.  The implicit additional slowdown in July exceeded expectations.
  • On Tuesday, China reported slowdowns in on-year export and import growth to 38.1% and 22.7% in July from 43.9% and 34.1% in June.

Japanese machinery orders, reported overnight, also weighed on investor sentiment.  Core private domestic orders rebounded only 1.6% in June from a 9.1% plunge in May.  Analysts had looked for an increase of around 4.5%.  Core domestic machinery orders edged just 0.3% higher last quarter, a fifth as much as officials had projected, and the forecast for the third quarter calls for another weak 0.8% uptick.  Foreign machinery orders decelerated to growth of 2.4% in the second quarter from a gain of 13.4% in the first quarter.

Domestic Japanese corporate goods prices, akin to a WPI measure, slid by 0.1% on month and on year in July.  Export and import prices fell on month by 2.2% and 2.7%, adding to the economy’s deflation problem.

Australian consumer confidence improved 5.4% in August after advancing 11.1% in July.  Earlier this week, business confidence and conditions were reported to have fallen two points and three points in July.  Confidence has dropped in five consecutive months.

Improvement is cresting in Britain’s labor market.  The claimant count of unemployment, which had declined by 23.9K per month in January-May, posted a dip of only 3.8K last month after a 15.9K decline in June.  The jobless rate has bottomed at 7.8% on an ILO basis and 4.5% on a claimant basis.  Weekly average earnings were just 1.3% higher than a year earlier in the second quarter, down from a 4.3% on-year gain in 1Q10.  Excluding bonus pay, such slowed to 1.6% on year in 2Q10 from 2.0% in the year to 1Q10.

The Hong Kong Monetary Authority retained a 0.5% base rate.  The rate moves in lock-step with changes in Fed policy, as officials subordinate domestic monetary policy to the priority of fixing the Hong Kong dollar against its U.S. counterpart.  The parity has been 7.8 HKD per USD since October 1983.

The Bank of England released a new quarterly Inflation Report in which projected economic growth was revised lower and both significant upside and downside risks to inflation were identified.  The target pace of inflation is seen getting restored in 2012 according to the baseline scenario.

South Korean unemployment, which crested at a 10-year high of 4.8% last January, ticked up to 3.7% in July from 3.5% in June.

France, the Czech Republic, and Turkey reported June current account deficits of EUR 2.7 billion, CZK 15.0 billion and TRY 3.8 billion, respectively.  The Dutch trade surplus widened over 10% that month to EUR 2.7 billion.

Consumer prices in July firmed 0.1% in both Hungary and Portugal.  On-year increases amounted to 4.0% and 1.8%, respectively.

U.S. and Canadian trade figures will be reported at 12:30 GMT.  The U.S. also reports the monthly federal deficit, the JOLTS index, and weekly oil inventories today.  An interest rate announcement by Norway’s central bank is not expected to modify the 2.0% key rate.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.

Tags:

ShareThis

Comments are closed.

css.php