Broad Dollar Gains and Sovereign Debt Price Losses… Oil Lower Too

November 16, 2016

Nothing about the Donald Trump phenomenon is playing out as pundits expected. The political talking heads repeatedly underestimated his victory chances through the Republican primaries and general election. And now market developments are fooling the economic prognosticators.

The dollar is super-charged, rising overnight by 1.7% against the ruble, 1.2% against the Australian dollar and Polish Zlotty, 1.0% vis-a-vis the Mexican peso, 0.9% against the Turkish lira, and 0.3% to an 8-year peak against the Chinese yuan. The greenback also gained 0.5% relative to the yen and is taking aim on the 110 threshold against Japan’s currency. The dollar likewise climbed 0.4$ against the Swiss franc and loonie, 0.3% versus the euro (moving past 1.0700), and 0.2 against sterling.

Among 10-year sovereign debt yields, U.S. Treasuries are up another 7 basis points at 2.29%. The Portuguese yield shot up 14 basis points, and those in Spain, Italy, and the U.K. are 8, 7, and 6 bps higher than yesterday. Even the Japanese JGB has gained 2 bps, moving above zero to a 9-month high.

Fed tightening next month is considered a sure bet. St. Louis Fed President Bullard intimated that fiscal spending and corporate tax cuts suggest a possible faster growth and greater need for a faster normalization of monetary policy but cautioned it’s too early to affect the near term. A 50-basis point move next month probably remains off the table but wouldn’t be a bad idea in my opinion as a way for Fed officials to signal that they are not going to allow inflation expectations to overshoot excessively on the upside.

In stock market action, Japan’s Nikkei-225 closed 1.1% higher, and share prices climbed 2.1% in Indonesia, 0.6% in South Korea and New Zealand, and 0.4% in Taiwan. But in Europe, the German Dax and British Ftse have lost 0.4% each so far. The Paris Cac is down 0.5%, and the Spanish and Italian markets have edged 0.2% and 0.1% lower.

West Texas Intermediate crude oil sank 1.4% on mounting U.S. inventories. Comex gold dipped 0.1%, and several industrial metals retreated from recent highs.

The Central Bank of Iceland left its one-week repo rate unchanged at 5.25%, defying some predictions of a 25-basis point cut. By way of explanation, officials said

Although inflation expectations appear to be more firmly anchored to target and the monetary stance has tightened to some extent through the appreciation of the króna, strong demand growth and the aforementioned uncertainties call for caution in interest rate setting.

Labor cost data released by Australia and the U.K. failed to show intensifying pressure.

  • Australia’s quarterly wage price index went up only 0.4% last quarter, trimming the on-year advance to a record low of 1.9% from 2.1% in the second quarter, 2.3% in the third quarter of 2015, and 2.5% in 3Q14.
  • British average weekly wage earnings in the 3 months to September were 2.3% higher than a year earlier, the same advance as in the three months to August and three months to July. Jobless claims jumped 9.8K in October, five times more than forecast, but the ILO basis jobless rate dipped 0.1 percentage point to 4.8%.

The Swiss ZEW index of investor expectations improved further to a reading of 8.9 in November from 5.2 in October, 2.7 in September and -2.8 in August.

India’s indices of leading and coincident economic indicators recorded October declines of 0.3% and 0.2%, respectively. Developing economies are especially vulnerable to the kinds of policy changes President-Elect Trump favors.

New motor vehicle sales in Australia fell 2.4% in October, reversing a September rise of like amount, and were 1.2% above the year-earlier level.

South African retail sales went up 0.6% in September and 1.3% on year.

This will be a big day for U.S. economic data releases, which include industrial production, producer prices, and the National Association of Home Builders’ housing market index. Canada reports manufacturing sales, orders and inventories. More Fed officials will be speaking today, and Yellen testifies before congress tomorrow.

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

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