Another U.S. Gaffe Lifts Euro to a 6-Month High

May 16, 2017

President Trump is alleged to have divulged elements of classified information regarding a terrorist plot to the Russians. He claims to have broken no law in doing so, but the optics surrounding this incident compound an already very toxic climate in U.S. politics.

The dollar fell overnight by 0.7% against the euro (to a half-year low), 0.6% relative the the Swiss franc, 0.2% vis-a-vis the Canadian dollar, and 0.1% against the yuan. The yen, Aussie dollar, kiwi and peso are steady, and sterling is 0.2% softer.

Stocks in the Pacific Rim closed mixed, dropping 1.1% in Singapore, 0.7% in Indonesia, 0.4% in New Zealand, and 0.1% in Taiwan but ticking up 0.1% in Hong Kong, 0.2% in South Korea and Australia, 0.3% in Japan, , 0.7% in China and 0.9% in India. Among European markets, the British Ftse and Italian MIB are 0.7% and 0.4% higher, and most other markets are only marginally changed.

Crude oil (+0.6%), gold (+0.4%) and industrial metal prices have risen further.

Ten-year German bund and British gilt yields are up two basis points, and their Japanese counterpart rose a basis point, too.

First-quarter GDP in a slew of European economies was reported. Euroland’s economy expanded 0.5%, the same pace as in 4Q16, and 1.7% from a year earlier, the same increase as occurred over the prior four quarter to 1Q16.

  • Quarterly growth in the four largest economies using the euro amounted in 1Q to 0.7% in Germany, 0.6% in France, 0.4% in Italy and 0.8% in Spain. On-year increases in GDP were 1.7% in Germany, 0.8% in France and Italy, and 3.0% in Spain.
  • Dutch and Belgian GDP climbed 0.4% and 0.5% last quarter, with on-year advances of 2.8% and 1.5%.
  • GDP grew 0.5% in Austria, 1.0% in Portugal, 1.6% in Finland and 0.6% in Cyprus, producing respective on-year increases of 1.9%, 2.8%, 2.6%, and 3.3%.
  • Greek GDP contracted 0.1% following a 1.2% dive in the final quarter of 2016. Greek GDP has been lower than a year earlier in three of the last four quarters, including a 0.5% decline in the year to 1Q17.
  • Turning to Eastern Europe, GDP last quarter rose 1.3% in the Czech Republic, 1.7% in Romania, 1.3% in Hungary, and 1.0% in Poland. On-year growth in those economies amounted to 2.9%, 5.6%, 4.1% and 4.0%, respectively.
  • French GDP expanded 1.2% in 2016 as a whole, marginally above a 1.1% pace in 2015 on average. Growth last year was depressed by drags of 0.8 percentage points in net foreign demand and 0.2% caused by changing inventory levels.
  • Norwegian GDP rose just 0.2% last quarter, down from 1.2% in the final quarter of 2016. Excluding offshore energy, mainland GDP growth accelerated to 0.6% from a rise of 0.4% in the prior quarter.

Investor confidence regarding Euroland improved sharply this month. The ZEW expectations index printed at 35.1 in May, up from 26.3 in April, 25.6 in March and 17.1 in February. Perceptions regarding Euroland current conditions advanced to a reading of 18.5 in May from 11.5 in April, 7.4 in March, 2.8 in February, -0.4 in January and -8.3 at the end of 2016. The ZEW expectations index for Germany rose to a 21-month high of 20.6, and current conditions there went up as well.

Euroland’s seasonally adjusted trade surplus of EUR 23.1 billion in March was 23% wider than the month before due to a 1.3% monthly rise of exports and a 1.2% drop in imports. The unadjusted trade surplus, EUR 30.9 billion, was larger than the March 2016 surplus of EUR 28.2 billion.

British CPI inflation accelerated 0.4 percentage points to 2.7% in April, highest since 2013. Such is expected to crest eventually around 3.0%. Core CPI climbed to 2.4% in April from 1.8% in March and 1.6% at the start of this year. Retail price inflation climbed 0.4 percentage points to 3.5% (3.8% if mortgage interest is excluded). Producer output prices recorded a 0.4% rise for a second straight month and were 3.6% above their year-earlier level. But producer input prices remained essentially trendless. While unchanged in April from January’s level, the PPI-I was still 16.6% greater than a year before due in part to the post-Brexit swoon of sterling. The house price index maintained by the British government’s statistical office reflected diminished inflation in that sector of 4.1% in March versus 5.8% in February and 7.0% last September.

New car sales in the European Union were 6.6% lower in April than a year earlier.

Japan’s tertiary index, a gauge of service industry activity, fell another 0.2% in March, defying speculation of a positive change for the first time since November. The tertiary index also dropped 0.2% on average in the first quarter and was 0.1% lower than the average of the first quarter of 2016.

Minutes of the last policy meeting at the Reserve Bank of Australia were as anticipated. There’s no indication that policy will begin to normalize soon. Officials expressed concern about trends in housing and the labor market.

Australian motor vehicle sales firmed 0.3% in April and showed only a 0.1% on-year rise.

U.S. data due today feature industrial production, capacity usage, housing starts and building permits. Treasury-compiled capital flows reported late on Monday showed big net inflows in the first quarter of $475 billion at an annualized rate for long-term assets and $536 billion at an annual rate for both short- and long-term capital flows.

Copyright 2017, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

 

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