Bond Selloff Gathers Impetus

October 27, 2016

Investor caution has shifted from stocks to bonds. Dollar changes against currencies of other advanced economies have been limited. Several emerging market currencies — e.g. the rand and won — have depreciated. Economic data released today have generally accentuated the positive.

The dollar lost 0.2% against the euro overnight and 0.1% relative to the loonie and Swiss franc. The dollar rose 0.2% against the yen, 0.3% relative to the Australian dollar, and 0.1% versus the yuan and kiwi. Sterling is steady after news that British GDP growth was surprisingly robust at 0.5% last quarter.

Share prices in the Pacific Rim fell 1.2% in Australia, 0.7% in Taiwan, 0.9% in Hong Kong, and 0.3% in Japan. Stocks in Europe are unchanged in the U.K., Germany and Spain, up 0.6% in Italy, but down 0.5% in Greece and 0.1% in France.

Ten-year bond yields extended their recent advance, with overnight increases of 7 basis points in British gilts and upward moves of 5 bps in Germany and France, 4 bps in Spain and Italy and 3 bps in Switzerland and the United States. Confidence continues to build that the Fed will tighten at one of its two remaining 2016 meetings. Less dovish than expected remarks from BOJ Governor Kuroda suggest Japan’s central bank will not augment monetary stimulus at its upcoming meeting on October 31-November 1.

Decisions today by the Swedish Riksbank and Norway’s central bank to leave key interest rates unchanged at record lows of -0.50% and +0.50%, respectively, elicited very different currency reactions.

  • The Swedish krona fell as Riksbank officials said it will take longer for inflation to rise back to its target, that the interest rate will stay at its current or lower level for longer, and that bond buying quantitative stimulus will likely be extended into 2017.
  • The Norwegian krone rose as officials there cited reasons why further stimulus is not likely. Oil prices and housing prices have been higher than assumed in last month’s review

The National ¬†Bank of Ukraine’s policy interest rate was slashed another full percentage point to 14.0%, consistent with “further alleviation of risks to price stability.” The cut brings the cumulative reduction in 2016 to 800 basis points, and a released statement promises more relief if the economy evolves as expected.

Bank of Israel policymakers are also meeting today.

British real GDP rose 0.5% last quarter and posted the largest on-year advance, 2.3%, in over a year. There’s scant sign thus far of Brexit headwinds hitting as yet. Services grew 0.8%.

A separate British indicator, the CBI’s distributive trades index jumped 29 points on month to a 13-month high of +21 in October.

On-year growth in Chinese corporate profits settled back to a 3-month low of 7.7% in September.

Japanese stock and bond transactions last week generated a net 1.436 trillion yen capital outflow as foreigners sold JGBs and Japanese residents were active buyers of foreign fixed income assets.

Australian export prices rose 3.5% last quarter, while import prices fell by 1.0%. Compared to a year earlier, export and import prices fell similarly, that is by 5.4% and 5.1% respectively. Between 3Q14 and 3Q15, by contrast, export prices had dropped 5.2% while import prices climbed 3.5%.

New Zealand recorded a greater than forecast NZD 1.4 trillion trade deficit last month.

South African producer price inflation slowed to a 4-month low of 6.6% in September from 7.2% in August and 7.4% in July.

Sentiment indices were released today for a number of economies.

  • South Korean consumer confidence rose 0.3 points to 102.0 in October.
  • Finnish consumer sentiment climbed 1.4 points in October to 15.8, the most optimistic level of 2016.
  • The Swiss UBS consumption ¬†indicator improved to an 8-month high of 1.59 in September from 1.53 in August, 1.45 in July and 1.21 in June.
  • Italian consumer sentiment weakened for a third straight time, falling to 108.0 in October from 108.6 in September and 111.2 in July.
  • Swedish economic sentiment jumped to 106.1 in October from 102.9 in September and 100.1 in August. Consumer confidence printed 4.4 points higher at 105.1, best since mid-2011, and manufacturing confidence rose 5.0 points to 105.8.
  • Finnish manufacturing sentiment fell 3 points to minus four in October.

The jobless rates last quarter averaged 4.9% in Norway, 2.1% in Singapore, but a whopping 18.9% in Spain, albeit down from 20% in 2Q. Brazilian joblessness in September was unchanged at 11.8%.

Icelandic consumer price inflation stayed at 1.8% in October. Greek producer prices posted a smaller 3.0% on-year decline in Setpember.

U.S. jobless insurance claims amounted to a continuing ultra-low 258K last week and averaged 253K over the past four weeks, similar to the 256K average in the previous 4-week period to September 24.

As expected, U.S. durable goods orders remained weak in September, dipping 0.1% compared to August and 1.2% versus September 2015. Non-defense durable orders that also exclude aircraft fell 1.2% on month, 3.6% on year and 3.9% in January-September versus the first nine months of 2015.

Still to come: U.S. pending home sales and the Kansas City Fed monthly manufacturing index.

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

 

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