Deluge of Politics and Economics at Midyear
June 30, 2016
Today’s Brexit bombshell is that the Leave movement’s leader, Boris Johnson, pulled out of the running to be Britain’s next prime minister and the person to decide when to invoke Article 50 of the Lisbon Treaty, which guides the unprecedented countdown for exiting the European Union. Johnson’s decision presumably will further delay what happens from here. The Leaves have provided no detailed plans, PM Cameron is a lame duck, the opposition Labour Party is rife with internal struggle, and the EU is plainly unwilling to let free British access it EU markets coexist with restrictions on the freedom of labor mobility.
Investors remain very mindful of the comparisons and contrasts between the Trump candidacy and the successful Brexit movement. George Soros expects the Brexit vote to serve as a further dynamic impulse to the next financial crisis.
On this final day of the first half of 2016, markets are comparatively calm.
- The dollar is marginally softer. Sterling has retained a $1.34 handle.
- Stocks in Europe are slightly up with gains of 0.5% in France, Spain and Italy and 0.1% in the U.K. and Germany.
- Share prices in the Pacific Rim earlier went up 1.9% in Hong Kong, 1.8% in Australia, 1.7% in Singapore, 1.5% in New Zealand, 1.0% in India, 0.9% in Taiwan, 0.8% in South Korea but a mere 0.1% in Japan.
- Ten-year sovereign debt yields slipped 4 basis points in Portugal, 2 bps in Italy, and a basis point in Spain but firmed a basis point in Germany and France. Japan’s 10-year JGB recovered 2 bps from a record low.
- West Texas Intermediate crude oil dropped 0.9% to $49.89 per barrel. Comex gold eased 0.3% to $1,320.90 per ounce.
On the central banking front,
- The Czech National Bank left its policy setting unchanged as expected. The 2-week repo rate has been at a record low 0f 0.05% since November 2012, and an asymmetric koruna policy that uses intervention to prevent it from appreciating beyond 27 per euro has been imposed as an extra stimulus tool since November 2013.
- The Central Bank of the Republic of China (Taiwan) announced a fourth consecutive 12.5-basis point cut in its policy interest rate to 1.375%. The vote was unanimous and expected. Taiwan’s economy has been clobbered by weak Chinese demand, and now the Brexit vote raises an extra worry.
- The National Bank of Romania left its interest rate at 1.75%, the level since a 25-basis point cut in May 2015 capped a series of downmoves totaling 350 basis points from mid-2013.
- Most banks handled the latest Fed stress tests very well.
The end of the quarter brought a flood of economic statistical releases today.
From Japan, industrial production fell 2.3% in May, much more than forecast, and this kept the 12-month change marginally negative at -0.1%. Motor vehicle output was 1.7% greater than a year earlier in May following a 9.7% drop in the year to April. Construction orders leaped 34.5% on year in May, most since April 2014 but following a 16.9% plunge in the year to April. Housing starts recorded on-year growth of 9.8% in May after 9.0% in April, 8.4% in March, 7.8% in February but a drop of 13.8% in January.
Revisions left first-quarter British GDP growth at 0.4%, well below the 0.7% quarterly pace in 4Q15. GDP was 2.0% higher than a year earlier in the latest quarter, and the U.K. current account deficit of GBP 32.59 billion remained substantial as a percent of nominal GDP at 6.9% after ratios of 7.2% in the fourth quarter and 5.4% in 1Q15. British consumer confidence stayed level at -1 in June but didn’t reflect the Brexit vote.
Euroland CPI inflation returned to the black for the first time in five months in June, albeit +0.1%. Energy posted a 12-month decline of 6.5% versus a drop of 8.1% in the year to May and of 8.7% in both March and April. Core inflation of 0.9% was similar to 0.8% in the previous 12 months to June 2015.
German retail sales volume advanced 0.9% in May, the largest monthly increase in ten months, and surpassed its year-earlier level by 2.6%. Sales had fallen in three of the first four months of 2016, so the April-May average was still 0.6% lower than the first-quarter mean. German unemployment fell by 6K in June, pretty much as forecast. The jobless rate stayed at 6.0%, and on-year jobs growth of 1.3% matched the pace in April and 1Q.
Italian consumer prices fell 0.4% in the year to June, and that economy’s PPI fell 3.7% in the year to May.
French consumer spending unexpectedly sank 0.7% in May after a 0.1% dip the month before. The 12-month rate of rise was 2.2%. French consumer prices rose 0.2% between mid-2015 and mid-2016, while French producer prices fell by 3.5% in the year to May.
The Swiss index of leading economic indicators edged up 0.6 points to a 2-month high of 102.4 in June.
In the year to April, Greek retail sales dropped 1.5%, helped by a 0.6% decline in the most recent month. Greek producer prices plunged 9.3% from May 2015 to May 2016, and Icelandic producer prices slumped a similar 9.5% in another example of regional deflationary pressure. In the year to May, Portuguese industrial production fell 2.0%, but its retail sales increased 3.0%. Danish real GDP was only 0.3% higher in the first quarter than a year earlier despite an upward revision to the quarter-on-quarter increase of 0.7%.
In other released data around the world,
China posted a $39.3 billion current account surplus in the first quarter, which was less than half the size of any quarter from 2015 including that of $85.3 billion in 1Q15.
In the year to May, M3 money expanded 6.1% in Australia and 7.3% in New Zealand. New Zealand business sentiment improved in May, but its building permits slipped by 0.9% after a 6.8% jump in April.
South Korean retail sales bounced by 0.6% on month in May after falling 0.5% in April, but industrial output in that economy fell 2.5%. Producer prices fell over the year to May by 5.4% in Singapore and 2.1% in Malaysia. Retail sales volume and value plunged 9.0% and 9.4% on year in May.
Buoyed by the rand’s sharp depreciation, South African producer prices were 6.5% higher in May than a year earlier, and M3 money advanced 7.8%. Turkey’s trade deficit widened 20% on month to $5.05 billion in May.
Canadian monthly GDP was weak in the three months to April, posting successive month-on-month GDP changes of -0.1% in February, -0.2% in March and +0.1% in April. GDP was just 1.5% higher in April than a year earlier. In the year to May, Canadian producer prices fell 1.1%, and raw material prices fell 10.6% overall and even 5.0% excluding mineral fuels.
U.S. weekly jobless insurance claims rose 10K last week to 268K, leaving its 4-week moving average unchanged at 266.75K. Still to come: Midwestern PMIs for June.
All in all, the state of politics in the world looks muddled, and the economy remains fragile after years of ultra-loose monetary policy but insufficient complementary support from fiscal policy and structural reform.
Copyright 2016, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: British GDP, China current account, Eurozone CPI, Japanese industrial production