Fresh Gloom Rekindles Risk Aversion

March 15, 2016

The Bank of Japan did not augment policy stimulus but did downgrade exports and residential construction and also observed that expected inflation has slipped.  The yen advanced 0.7% against the dollar and euro overnight in response.

West Texas Intermediate crude oil fell 2.0% overnight and has faded slightly more than 5% over the past two days.

Gold slipped 0.3%.  The softness of commodities has hit emerging market currencies.  The Russian ruble and South African rand are each down more than 1.0% on the day.  The Chinese yuan has reacquired a 6.5 handle against dollar in both the official and offshore rates after previously strengthening back above 6.50 for several sessions.

U.S. retail sales slipped 0.1% in February, and January’s change was revised from a rise of 0.2% reported a month ago to a decline of 0.4%.  It’s thought that this may make Fed officials more hesitant to sanction a second rate increase.  The FOMC meets today in the first of a two-day policy meeting to be followed by a press conference and newly released forecasts on Wednesday.

Today is a big primary day.  On the Republican side, Kasich must take Ohio and Rubio Florida — their home states — in order to presumably stay in the race.  Trump should move closer to sealing the nomination.  Clinton continues to have trouble fending off Sanders’ challenge in the Democratic Party race.

U.S. stocks opened lower.  Earlier today, stocks in the Pacific Rim closed down 1.4% in Australia, 1.6% in Taiwan, 1.1% in Hong Kong, 1.0% in India, and 0.7% in Japan.  In Europe, equities have dropped 1.5% in Spain, 1.2% in Italy, 1.0% in France, 0.8% in Germany and Switzerland, and 0.6% in Great Britain.

Ten-year Treasury and British gilt yields fell by three basis points, but their Japanese counterpart rebounded three bps to -0.02%.

The dollar is steady against the euro and Swiss franc but has advanced by 1.1% against sterling, 1.0% versus the kiwi, 0.8% relative to the loonie and 0.6% vis-a-vis the Australian dollar.

Employment in the eurozone increased 0.3% last quarter, the same quarterly pace as in 3Q15.  Jobs rose 1.2% between the final quarters of 2014 and 2015, led by gains of 3.0% in Spain and 2.5% in Greece.  But Finnish jobs were unchanged.  So was employment in the U.K., which is part of the European Union but not the euro area. Chancellor of the Exchequer Osborne presents the annual British budget tomorrow.

Tomorrow, too, Fed Chair Yellen will preside over a press conference to explain the latest thinking of Fed officials.  In the meantime, today saw the release in addition to U.S. retail sales of February U.S. producer prices which slid 0.2% on month and were unchanged compared to a year earlier.  The Empire State manufacturing index, which is compiled by the New York Fed, printed above zero in March for the first time since last July.  It rose to 0.62 from a reading of -16.64 in February and -19.37 in January.  Finally, the National Association of Home Builders housing index was 58 in March, same as February’s level but down from 61 in January and December, 62 in November, and 65 in October.

Swedish CPI inflation was halved to 0.4% in February from 0.8% in January.  Core inflation dipped 0.1 percentage point to 1.1%.  Polish consumer prices in February were 0.8% lower than a year earlier.

French CPI inflation returned to the red in February for the first time in 11 months, swinging from +0.2% in January to negative 0.2%.

Italian consumer prices fell 0.2% on month and 0.3% on year in February.

Japan’s tertiary index, which measures service-sector activity, rebounded 1.5% in January, reversing back-to-back declines of 0.9% in November followed by 0.6% in December.  The tertiary index was 0.1% higher than in January 2015.  A 3.7% advance in Japanese revised industrial production was unchanged from the preliminary indication.  Capacity usage increased 2.6% on month but was 5.4% lower than in January 2015.  Capacity dipped 0.2% on month and 0.6% on year.

The Bank of Japan’s vote to retain a -0.1% policy interest rate along with a basic balance rate of 0.1% and a macro add-on rate of zero was split 7-2.  When introduced at the January 29 meeting, the vote in favor of a negative interest rate had been more narrowly favored at 5-4.  The quantitative elements of BOJ stimulus remain the same, a plan to buy JPY 80 trillion annually of JGBs and to lengthen the JGB portfolio’s average maturity to 7-12 years.  In the subsequent press conference, Governor Kuroda reiterated a readiness to stimulate further if the need arises.

Australian motor vehicle sales dipped 0.1% in February and had a 12-month increase of 2.3%, less than half the on-year gain in January.  Published minutes from the Reserve Bank of Australia’s policy meeting earlier this month observed that GDP continues to expand at a sub-trend pace and that a future interest rate cut is possible, depending on the path of inflation.

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

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