Several Central Bank Rate Cuts and Data Surprises Lift Dollar

June 11, 2015

The U.S. dollar leaped 2.8% against its New Zealand counterpart and also rose overnight by 0.9% against the yen, 0.6% relative to the euro, 0.4% versus the loonie, Aussie dollar and sterling, and 0.3% vis-a-vis the Swiss franc.  Chinese officials held the yuan steady.

The Reserve Bank of New Zealand’s Official Cash Rate was sliced 25 basis points to 3.25% in an unexpected move.  This was the first cut since March 2011.  In between, there had been four 25-bp hikes administered in March, April, June and July of 2014.

The Bank of Korea reduced South Korea’s seven-day repo rate by 25 basis points to 1.50%.  Analysts were divided over whether the central bank would leave the rate unchanged or cut.  Earlier reductions of 25 basis points each were done in May 2013, August and October 2014 and, most recently, March 2015.

The National Bank of Serbia cut its key policy rate to 6.0% from 6.5% as expected.  The rate has been cut four times this year by a total of 200 basis points following reductions totaling 150 bps in 2014 and 225 bps in 2013.

Markets now await U.S. retail sales, import prices and weekly jobless insurance claims.

Share prices in the Pacific Rim advanced 1.7% in Japan, 1.4% in Australia, 1.0% in New Zealand and 0.9% in Hong Kong but fell 1.8% in India and closed unchanged in Taiwan and China.

In Europe, the Athens stock index soared 6.7%, and share prices have advanced by 0.8% in Germany and Italy, 0.6% in France and Spain, 0.5% in Switzerland, and 0.3% in Great Britain.

In a day that saw several European governments auction debt, the 10-year German bund and Japanese JGB yields went up four basis points each to 1.02% and 0.54%, respectively.  Peripheral bond yield spreads widened.

German Chancellor Merkel and Greek Prime Minister Tsipras held further debt talks.  Greece’s creditors seem to have the most bargaining leverage.  Greece has until end-June to act or face debtors’ abyss.

West Texas Intermediate oil fell 1.3% to $60.63 per barrel.  Comex gold is 0.7% softer at $1,178.70 per troy ounce.

Semi-annual forecasts were released by the World Bank, projected a downwardly revised global GDP growth rate in 2015 of 2.8% along with gains of 3.3% next year and 3.2% in 2017.  Collective growth this year among developing economies was cut by 0.4 percentage points to 4.4% but is projected to recover to 5.7% in 2016 and 5.4% in 2017.  Growth in India will surpass that in China for all three years by a cumulative margin of 25.3% to 22.5% over the three-year span.  Meanwhile, The World Bank cut 2015 growth forecasts in the U.S. and Japan to 2.7% and 1.1% but bumped projected eurozone growth up 0.4 percentage points to 1.5% this year.  The revisions follow a pattern seen by other think tanks of narrowing the 2015 growth differential between the U.S. and Euroland.

China released industrial production, retail sales, fixed asset investment, bank lending and money growth data for May.

  • Industrial output rose by a marginally higher-than-forecast 6.1% on year after 5.9% in April, 5.6% in March and 7.9% in 2014.
  • Retail sales grew more slowly than predicted, advancing 10.1% on year versus 10.0% in April and 11.9% last December.
  • Fixed asset investment in January-May grew 11.4% on year, down from 12.0% in the first four months of 2015 and 15.7% in 2014.
  • Bank lending totaled 901 billion yuan, marginally less than the average of the March and April results but higher than forecast.
  • M2 money growth accelerated to 10.8% from 10.1% in April and exceeded forecasts.

China’s central bank cut projected growth and inflation in 2015 to 7.0% and 1.4%.

Australian labor statistics for May were much better than expected.  Jobs advanced by 42K, almost three times more than forecast.  This was the third outsized increase within the first five months of the year.  The unemployment rate, which had been at 6.4% in January, dipped 0.1 percentage point to 6.0%, but labor participation failed to rise as analysts had presumed.  These data reduce chances for further near term interest rate cuts.

Several price data releases showed lessening deflationary pressure.  Sweden’s on-year CPI inflation swung from -0.2% in April to +0.1% in May.  Portuguese CPI inflation accelerated to 1.0% in May from 0.4% in the prior months.  Irish deflation softened to -0.3% from -0.7%.  French CPI inflation picked up to 0.3% from 0.1%. 

But a measure of Australian expected inflation over the next year slowed to a 14-month low of 3.0% from 3.6% in the prior survey.

French non-farm jobs growth last quarter slowed to 4.7K from 26.4K in the final quarter of 2014. 

In the quarterly business survey of Japan’s Ministry of Finance, sentiment for large corporations printed at -1.2 this quarter, down from +1.9 in 1Q15.  Higher results of 10.6 in 3Q and 8.9 in 4Q are predicted, however.  The deterioration in the second quarter was concentrated in manufacturing companies, who nonetheless lifted their planned investment expenditures during the current fiscal year.

Japanese stock and bond transactions last week generated a JPY 709 billion net capital inflow, 5.5% less than in the prior week.

Malaysian industrial output slid 0.4% in April, trimming the 12-month rate of increase to 4.0%.

Turkey’s current account deficit narrowed 32% on month to $3.4 billion in April and was 13% smaller in January-April than a year earlier.

The U.S. federal deficit of $82.4 billion last month was $48 billion less than in April.

Aside from the aforementioned U.S. data releases today, Canada will report capacity usage and new home prices.  Interest rate decision are due in Peru and Chile, neither of which is expected to involve a change.

Copyright 2015, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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