Market-Moving Comments and Then a Chinese Interest Rate Cut

November 21, 2014

ECB President Draghi gave a dovish speech reaffirming the central bank’s readiness to take further action to lift inflation back to target.

U.S. President Obama spoke to the nation in prime time, announcing plans to permit some 5 million undocumented residents not to be deported.

San Francisco Federal Reserve President Williams warned about the danger of weak global growth and low inflation-adjusted interest rates.

St. Louis Fed President Bullard said U.S. unemployment is close to falling to its long-run average.

Japanese Finance Minister Aso protested the sharpness of the yen’s recent decline, saying that neither a steep climb or fall is welcome.

Japanese Prime Minister Abe formally dissolved the lower house of the Diet, a necessary step for holding elections next month.

But the big news so far today was a rate reduction announced by the People’s Bank of China.  There had been cuts in June and July of 2012 but no subsequent changes in the one-year lending rate (now cut to 5.60% from 6.0%) or the one-year deposit rate, which is being reduced by 25 basis points to 2.75%.  This announcement marks a departure from a previous limit this year to only selective monetary policy support and comes after a recent spate of weaker-than-anticipated data covering industrial production, bank lending, money growth, and business investment.  Moreover, CPI inflation of 1.6% in October was the lowest since January 2010 and down from 2.5% as recently as May, and producer prices, down 2.2% in the year to October, have posted on-year drops since March 2012.  Lower inflation had raised the central bank’s real interest rates while nominal levels were kept previously steady.  Chinese growth is at a 24-year low.

Against the above background, the dollar has risen 0.9% against both the euro and Swiss franc but declined by 0.9% and 0.6% versus the Aussie dollar and kiwi.  The yuan is steady, however, at 6.1246 per dollar.  The greenback has firmed 0.2% relative to the loonie and sterling but slid 0.1% vis-a-vis the yen.

Share prices are generally higher, sharply so in several cases such as 1.8% in China, 1.0% in India, 0.9% in Singapore, 2.1% in Spain, 1.9% in Italy, 1.8% in Germany, and 1.6% in France.  Japan’s Nikkei is up just 0.3%, in contrast, and New Zealand’s market slipped 0.6%.  The British Ftse has risen 0.8%.

Ten-year Japanese JGB and British gilt yields dropped two basis points each, while the German bund is steady.

West Texas Intermediate oil jumped 1.2% to $76.79 per barrel.  Comex gold has firmed 0.3% to $1,194.50 per barrel.

Data releases have been light today after yesterday’s cornucopia of reports.

The German indices of leading and coincident economic indicators each were unchanged in September according to the Conference Board.

Euro area consumer sentiment worsened 0.5 of a point to negative 11.6 this month.

Swiss M3 on-year money growth stayed level at 3.4% in October.

Malaysian CPI inflation ticked 0.2 percentage points higher in October to 2.8%.

Irish producer price inflation swung from negative 0.6% in September to +0.3% last month.

Italian wages were only 1.0% higher than a year before in October.

British net public sector net borrowing in October amounted to 7.055 billion, 2.4% less than a year before.

Still to come: Canadian consumer prices, Mexican GDP, and the Kansas City Fed monthly manufacturing index.

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

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