Markets Sustained by a Belief that Help is on the Way

August 12, 2016

Investors are confident that central banks won’t let bad things happen.

  • The Central Bank of Chile kept a 3.5% interest rate benchmark and dropped language about future rate normalization. Like many other monetary authorities except perhaps the Fed, plans to tighten are getting delayed and in many cases like the Bank of England and BOJ more stimulus is being undertaken. Chile’s central bank had raised its rate by 25 bps each last October and December.
  • The Central Reserve Bank of Peru left its key interest rate at 4.25%. Such had previously been lifted four time between September 2015 and February 2016. But inflation is back in target, and expected inflation has receded.

Oil prices are holding above $43 at $43.44 per barrel on hopes that the Saudis and Iran will at last work together to rein in production and prevent the price from falling.  Oil-sensitive currencies like the Norwegian krone had a good week.

Investors have been relieved that China’s slowdown may be stabilizing.  However, data released today by China were a bit soft.

  • On-year growth in industrial production slowed to 6.0% in July, matching April and May results, from 6.2% in June.
  • On-year growth in retail sales slowed to 10.2% in July after having accelerated to 10.6% in June from 10.0% in May.
  • Fixed asset investment in January-July expanded 8.1% on year, down from a 9.0% on-year increase in the first half and 10.7% in the first quarter of 2016.
  • New bank lending in July of just 464 billion yuan was merely half as much as forecast and down sharply from 1.380 trillion yuan in June.
  • On-year M2 money growth slowed to 10.2% in July from 11.8% in June.

Investors have been relieved that Donald Trump’s campaign has hit many bumps since the conventions, but in fact the polls remain too close to assume any outcome and there’s still almost three months before election day.

The dollar is little changed ahead of U.S. retail sales and producer price data releases. The U.S. rally on Thursday of share prices carried over into the Pacific Rim where stocks rose 1.6% in China, 1.2% in Hong Kong and 1.1% in Japan and India. But stocks in Europe are little changed. Gold settled back 0.3% to $1,345.40 per ounce. Sovereign debt yields are comparatively steady, with a 1-basis point dip in Japan and a 1-bp rise in Great Britain.

The first estimates of European second-quarter GDP are out. Euro area growth was halved to 0.3% on quarter from 0.6% in 1Q and printed at 1.6% on year. The French and Italian economies did not grow at all in 2Q, but German GDP went up 0.4%, twice expectations. Spain’s GDP climbed 0.7%, and Dutch GDP rose 0.6%.

Industrial production in Euroland rebounded 0.6% in June after a 1.2% slide in May.  Output was just 0.4% greater than a year earlier in June. German production increased 1.0% on month, but output fell in France, Italy, and Spain.

German consumer prices increased 0.3% in July, lifting the 12-month rate of rise to a six-month high of 0.4%. Energy dropped 7.0% on year, while all other consumer prices were 1.3% higher.

German wholesale prices edged 0.2% higher in July, and the on-year drop of 1.4% was the smallest since January.

Spanish consumer prices fell 0.7% on month and 0.6% on year in July.

British construction output fell 0.9% on month and 2.2% from a year earlier in June. Such posted month-on-month declines in five of the six months in the first half of 2016, and Brexit points to more softness ahead.

Japanese stock and bond transactions generated a net 1.894 trillion yen capital outflow last week following a JPY 610 billion inflow in the previous week.

New Zealand retail sales volume jumped 2.3% on quarter in 2Q16, most since 4Q06, and was 6.0% greater than its year-earlier level.

New Zealand’s manufacturing purchasing managers index slid back to a 2-month low of 55.8 in July from 57.6 in June.

In the second quarter, real GDP posted quarter-on-quarter growth of 1.1% in Hong Kong and 0.7% in Malaysia, and their respective on-year advances were 1.7% and 4.0%.

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

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