German IFO and Moody’s Generate Troubling News

August 24, 2011

Moody’s downgraded Japan’s credit rating to Aa3 from Aa2, citing a big government deficit and rising debt/GDP ratio.  The news hurt Asian stocks.

The IFO Institute reported a sharp drop and weaker-than-anticipated German business climate in August.  The overall index tumbled 4.2 points to 108.7, lowest since mid-2010.  The index had been at 114.4 just two months ago and crested at 115.4 in February.  Current conditions and business expectations fell in the latest month by 3.3 points and 4.9 points to 118.1 and 100.1.  The sectoral breakdown by industry showed month-on-month declines of 7.6 points in manufacturing, 5.7 points in construction, 10.9 points in wholesaling distribution, and 8.9 points in retailing.  IFO officials concluded that even Germany is not immune to “worldwide turbulence.” 

A sister IFO index of services industries fell to 19.7 in August from 25.3 in July and 33.0 in February.  The expectations component plunged 8.0 points, while current conditions dropped 3.0 points.

More ominous news came when Eurostat released June industrial orders for the euro area.  Such fell 0.7% on month in June, with a 3.0% drop in core orders that exclude heavy transport equipment.  Overall orders were still 11.1% greater than in June 2010, but the 12-month rate of increase in February had been 20.9%.

Stocks in Asia declined by 1.2% in South Korea and Vietnam, 1.6% in Singapore, 1.3% in India, 1.1% in Japan, 1.0% in Thailand, 2.1% in Hong Kong, 1.3% in India, 0.9% in Indonesia, 0.6% in Taiwan, 0.9% in Malaysia, and 0.4% in China.  In Europe, however, the German Dax, Paris Cac and British Ftse show gains so far of 1.1%, 0.7%, and 0.2%.

The kiwi and Aussie dollar fell by 0.8% and 0.4% against their U.S. counterpart on some weak local data.

  • Australia reported on-quarter and on-year declines in building construction done of 4.9% and 14.6%.  Total construction completions in 2Q rose 0.7%, cutting their on-year increase to 2.0% from 4.9% in 1Q.  Australia’s index of leading economic indicators fell 0.8% in June.  The coincident index edged only 0.1% higher.
  • New Zealand imports were 4.6% lower in July than a year earlier, which led to the first July trade surplus (NZD 129 million) since July 1991.

The U.S. dollar otherwise has slid 0.3% against the Swiss franc, 0.2% versus the yuan and yen, and 0.1% against the euro and sterling. 

The death at age 61 in Canada of Jack Layton, leader of the opposition New Democratic Party, has produced a big vacuum in that nation’s politics.  The loonie is 0.1% softer against the greenback.

The yields on 10-year British gilts and German bunds each rose five basis points overnight.  The JGB firmed one basis point

Since touching a record high yesterday of $1913.50 per ounce, gold prices have lost 3.4% to $1847.90.  Oil dipped 0.3% overnight to $85.15 per barrel.

Colonel Gaddafi has still not been caught in Libya.

As most expected, the Bank of Thailand raised its one-day bond repurchase rate by another 25 basis points to 3.5%.  But central bank officials dropped clues that the tightening cycle may be nearly over.

Japanese corporate service prices were unchanged on month in July and 0.5% below a year earlier.  That was the smallest on-year decline of the CSPI in over a year.

Japan’s Ministry of Finance announced a $100 billion program to transfer some of its foreign exchange reserves to the Japanese Bank for International Cooperation so that the latter can provide export credits to firms squeezed by the strong yen.  It may be that instead of intervening, selective damage control to exporters will be provided in this fashion.

Vietnamese consumer prices climbed 0.9% in August and were 23.0% higher than a year earlier.

South African consumer prices rose 0.9% in July, and the 12-month inflation rate increased to 5.3% from 5.0% in June.

Greece posted a EUR 1.63 billion trade deficit in June, less than EUR 2.08 billion a year earlier thanks to an 11.6% plunge in imports.  Greek industrial order fell in June by 1.4% and were 6.0% lower than in June 2010. 

Norway’s unemployment rate held steady at 3.3% in July.

Czech business sentiment fell a full point to 10.3 in August.  Consumer confidence sank 2.7 points to negative 23.0.  Overall economic sentiment printed at 3.7, down from 5.0 in July.  Poland’s jobless rate slid a tenth percentage point to 11.7%, its fifth straight decline.  Polish retail sales rose 0.7% in July and by 8.2% from a year earlier.  These gains were nonetheless smaller than forecast.  Hungarian retail sales fell 0.5% both on month and on year in June.

The FHFA index of U.S. housing prices will be released today.  Durable goods orders also arrive.  Bernanke’s speech in Wyoming on Friday remains a market obsession.  The hope that he will announce new monetary stimulus is the only thing preventing a further stock market bloodbath in the U.S. and Europe so far this week.

Copyright 2011, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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