A Number of Surprises

October 9, 2014

Fed officials rarely comment on the dollar, so the following passage from minutes of September 16-17 meeting of the FOMC caught the market’s attention, sending the dollar and bond yields lower and turning around Tuesday’s swoon in equities.

Some participants expressed concern that the persistent shortfall of economic growth and inflation in the euro area could lead to a further appreciation of the dollar and have adverse effects on the U.S. external sector. Several participants added that slower economic growth in China or Japan or unanticipated events in the Middle East or Ukraine might pose a similar risk. At the same time, a couple of participants pointed out that the appreciation of the dollar might also tend to slow the gradual increase in inflation toward the FOMC’s 2 percent goal.

While most viewed the risk that inflation would run persistently below 2 percent as having diminished somewhat since earlier in the year, a couple noted the possibility that longer-term inflation expectations might be slightly lower than the Committee’s 2 percent objective or that domestic inflation might be held down by persistent disinflation among U.S. trading partners and further appreciation of the dollar.

Overnight the dollar fell 0.9% versus the New Zealand dollar, 0.7% against the yen, 0.6% vis-a-vis the Aussie dollar, 0.5% relative to the Swiss franc, 0.4% against the euro and sterling, 0.2% versus the loonie and 0.1% relative to the yuan.

Equities in the Pacific Basin advanced by 1.5% in India, 1.2% in Hong Kong, 1.1% in Australia, 1.0% in Singapore, and .7% in Indonesia.  But those in China and Taiwan edged just 0.1% higher, the South Korean Kospi slid 0.4%, and Japan’s Nikkei fell by 0.8%.  The German Dax’s rise of 1.1% has outperformed other European markets.  Stocks are up 0.6% in Switzerland, 0.4% in France and Britain, 0.2% in Spain and down 0.1% in Italy so far.

10-year sovereign debt yields have declined by four basis points in the U.K., two bps in Germany and a basis point to 0.48% in Japan.

Comex gold climbed 1.8% to $1,227.40 per ounce, whereas oil edged 0.1% lower to $87.23 per barrel of WTI.

Several data surprises augmented the unexpected FOMC discussion on the dollar.

For instance, a 29.7K decline in Australian jobs in August was the largest drop in 2-1/2 years and accompanied by the highest unemployment rate (6.1%) since July 2003.

German exports plunged 5.8% on month in August, the largest seasonally adjusted decline in 57 months.  Imports also underperformed expectations with a monthly decline of 1.3%.  The seasonally adjusted trade surplus of EUR 17.5 billion, although matching the second-quarter monthly average, was 4.7 billion euros narrower than in July.  The current account surplus of EUR 10.3 billion was just half as big as July’s EUR 20.1 billion, but seasonal weakness in non-trade items were a prominent factor.  The August 2013 current account surplus had been EUR 7.9 billion.  Merchandise exports and imports recorded on-year drops of 5.8% and 1.3%.

The DIW Economic Institute in Berlin revised projected 2014 German GDP growth down a half percentage point to 1.3% and knocked 0.8 percentage points off its forecast for German growth next year to just 1.2%.

While many Japanese economic trends have lately been disappointing, a notable exception involves core domestic private machinery orders, which posted successive month-on-month increases of 8.8% in June, 3.5% in July and 4.7% in August.  Analysts were projected only a very small rise in the latest month, and the July-August average gain of 7.7% versus the 2Q mean easily surpasses the government’s projected 3Q-over-2Q assumed rise of 2.9%.  As a result, officials upgraded their assessment of machinery orders from “moving back and forth” to “showing a moderate pick-up.”  Foreign machinery orders rose 29.1% on month and 14.9% on year in August, while core private domestic orders were still 3.3% lower than in August 2013.

Japanese stock and bond transactions generated a 2.03 trillion yen net capital outflow in the week bridging the middle of the economy’s fiscal year.  An 818 billion inflow had occurred in the prior week.  Japanese machine tool orders were 34.8% higher than a year earlier in September, similar to the 35.5% rise in August.

Bank of Japan Governor Kuroda made remarks suggesting greater willingness to use extra stimulus should the 2% inflation goal appear elusive.

Alcoa’s third-quarter earnings report beat expectations by a considerable margin.

China’s weekly injection of central bank liquidity was the largest in six weeks.

The Russian parliament authorized the government with the power to commandeer foreign assets held in Russia as a retaliation to any foreign sanctions against Russia that are deemed illegal.

The Bank of England as expected did not change its policy.  The Bank Rate has been at 0.5% since March 2009, and the asset purchase program, last raised in July 2012, stays at GBP 375 billion.

The Royal Instituted of Chartered British Surveyors reported a 10-point drop in its house price balance index to 30%, a 15-month low.

Home prices in the euro area advanced 0.9% between the first and second quarters of this year.  This lifted the year-on-year pace to zero from negative 0.4% in 1Q and -1.7% in the final quarter of 2013.

The French trade deficit widened slightly to EUR 5.8 billion in August, as exports recorded a 1.4% monthly decline.  Hungary’s trade surplus narrowed 44% to EUR 270 million in August, while the Danish current account surplus grew 80% to DKK 17.1 billion.

CPI data were released in Greece, the Netherlands, Ireland, and the Czech Republic.  Their respective 12-month inflation rates as of August were respectfully at negative 0.8% (twice as great as forecast), 0.9%, 0.3%, and 0.7%.

U.S. weekly jobless insurance claims will be reported shortly.  Bullard and Williams of the Federal Reserve speak today, and Draghi, the ECB President, will be speaking publicly, too.  He’s in Washington, where a G20 meeting of finance ministers and central bankers is being held ahead of the IMF/World Bank meetings.  Peru’s central bank will report its latest policy decision today.

Copyright 2014, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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