Fasten Your Seatbelts

January 6, 2016

Having gotten off to a bad start in 2016, global financial markets were desperately in need of some good economic data and other news.  The service sector purchasing managers surveys for December failed to deliver, but that’s only one element of today’s multiple doses of disturbing news.

  • The Chinese yuan was fixed significantly lower against the dollar and at its weakest since April 2011.  Depreciation has emerged this year as a key pillar of the government’s efforts to halt decelerating growth.  Such a strategy is inconsistent with plans to rotate the primary sources of economic growth away from exports and investment.  It’s also bad news for commodities and emerging economies.
  • West Texas Intermediate oil plunged 2.7% to $35.01 per barrel, augmenting yesterday’s drop of 2.2%.
  • North Korea claims to have conducted a fourth H-bomb test, and it was successful.
  • Eurozone producer prices posted a fifth straight month-on-month decline in November, this time of 0.2%.  The PPI declined 3.2% in the twelve months to November and at an even faster 3.7% annualized rate over the past half-year.  The European PMI data reported today corroborates the persistence of deflationary risk in the region.

The U.S. dollar shows overnight gains of 1.2% against the Australian dollar, 0.9% versus the New Zealand dollar and 0.7% relative to the Canadian dollar. 

The yuan is 0.5% weaker against the dollar.  The Chinese currency is fetching 2.4% less than the official rate in offshore trading, fanning rumors that a more substantial devaluation may be imminent.

Japan’s yen is extremely well bid today, rising 0.6% against the U.S. currency and to a 15-month high against the yuan.  This trend poses a huge challenge to policy attempts to lift Japanese core inflation to 2%.

The dollar is unchanged against the euro and Swiss franc and only 0.2% firmer vis-a-vis sterling.

A broad cross-section of emerging market currencies have lost over 0.5% today.

The South Korean won is nearly 1% weaker against the dollar following North Korea’s nuclear bomb test.

Although Chinese stocks recouped some lost ground, other bourses in Asia and those in Europe are showing red on the screens.  Today’s declines amount to 1.2% in Australia, 1.1% in Singapore and Taiwan, 1.0% in Japan, 0.9% in Hong Kong, 0.7% in India, 2.0% in Italy, 1.5% in Spain and Germany, 1.6% in France and Britain, and 1.2% in Switzerland.  Emerging market share prices fell to lows seen last in mid-2009.

Hot money flows in search of a safe haven have depressed the 10-year Treasury yield by another five basis points to 2.19% and lifted gold by 0.7% to $1,084.77 per troy ounce.  The 10-year British gilt yield is also five basis points lower, and its Japanese counterpart dipped another basis point to just 0.24%.

The timing couldn’t be worse for today’s scheduled release of minutes from the FOMC’s December meeting that raised the federal funds rate for the first time in 114 months and expressed confidence that the U.S. economy should continue to perform better.  The danger is that the minutes will portray monetary policymakers as out of touch juxtaposed against the ominous developments since they met.

Japan’s composite purchasing managers index edged 0.1 point lower to a 3-month low of 52.2.  The services PMI, 51.5, represents a 5-month low, but a 4-month high in business expectations was a silver lining in the report.

China’s services PMI fell a full point to a 17-month low of 50.2, the second worst level since at least late 2005.  China’s composite PMI, 49.4, represents a 3-month low and denotes worsening operating conditions in the world’s second largest economy.

Britain’s composite and service-sector purchasing manager indices of 55.3 and 55.5 in December are the lowest readings in three and two months, respectively.  An average reading of 55.4 in the second half of 2015 compares with a mean score of 58.0 in the first half, 58.2 in 2014, and 56.9 in 2013.

Private PMI scores for December of 52.1 in Singapore, 49.1 in South Africa, and 46.4 in Hong Kong represent 2-, 2- and 3-month lows.

Service sector activity in Spain and Ireland grew more slowly in December than November, but still showed strength with PMIs of 55.1 and 61.8.

The French service sector PMI of 49.8 was below the 50 line dividing expansion from contraction for the first time since January 2015.  Like France’s composite PMI of 50.1, it represents an 11-month low.

Australia’s Performance of Services PSI index tumbled 1.9 points to 46.3 in December, a 13-month low.  There have been three sub-50 readings in a row.

The Brazilian services and composite PMIs of 43.5 and 43.9 reflect a severe recession whose pace of contraction was greater than in November.

Overall, bad PMI news outweighed good reports.  Among the latter group,

  • Germany’s services and composite PMIs of 56.0 and 55.5 were higher than flash estimates and indeed the best scores for the eurozone’s largest economy since July 2014.
  • Italy’s services PMI of 55.3 and composite manufacturing and services score of 56.2 constitute 69- and 58-month highs.
  • India’s services PMI swung from a 5-month low of 50.1 in November to a ten-month high of 53.6 last month.  The composite index was only a 2-month high, however, as manufacturing sunk under the 50 no change threshold for the first time since October 2013.
  • Euroland’s service-sector PMI held steady at November’s 3-month high of 54.2.  The composite eurozone PMI of 54.3 was at a 4-month high, but only implies real GDP growth of around 0.4% last quarter and 1.5% for 2015 as a whole.  One would have hoped for a greater boost from quantitative monetary stimulus by the ECB over the final ten months of the year.

British shop prices fell 2.0% on year in December.  Such had dropped 1.7% over the 12 months through December 2014.

French household confidence printed at 96 for a third straight month in December but below September’s reading of 97.

Producer prices in Hungary and Romania fell 0.8% and 2.6% in the year to November.

The U.S. goods and services trade deficit narrowed unexpectedly and by 5% to $42.37 in November.

Canada’s trade deficit narrowed by an even sharper 20% to C$ 1.99 billion in November.

U.S. private-sector employment jumped 257K last month according to ADP after a revised gain of 211K in November.

Still to come:  ISM releases the non-manufacturing U.S. purchasing managers index at 10:00 EST (15:00 GMT), and FOMC minutes arrive at 14:00 EST.  The Commerce Department releases U.S. factory orders at 10:00 EST, too.

Copyright 2016, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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