Some Confusion Understanding Central Banker Intentions

June 28, 2017

ECB President Draghi said several things yesterday. A remark that the pendulum of price pressure is shifting away from deflation toward reflation had caught the market’s immediate attention and driven the euro higher, but the ECB today clarified that investors had not given sufficient weight to his other observation that plenty of monetary stimulus is still needed.

Federal Reserve Chair Yellen likewise made several points yesterday, the gestalt of which gleaned by the market was that slower inflation lately would not impact future efforts to raise the federal funds rate. She also expressed some concern that equity prices are perhaps getting too high. Market conditions today are perceiving Fed policy policy guidance as less straight forward. There’s a diversity of opinion over what underpins the drop in inflation and whether such might endure. Minneapolis Fed President Kashkari and Chair Yellen disagree on the likelihood of another financial crisis in the medium term.

The area of clearest consensus seems to be that rate normalization must be “gradual.” Two U.S. rate hikes already have been made this year and three within the past 6-1/2 months going back to December. Over the coming half year, one further increase appears much more probable than two. An important known unknown that may influence monetary policy substantially is the uncertain fate of the Senate repeal and replace healthcare bill, especially since tax reform and deregulation possibilities seem to hinge on that fate.

Bank of Canada Governor Poloz, Bank of England Governor Carney and Bank of Japan Governor Kuroda will be speaking publicly later today.

The dollar has risen 0.2% against the euro and 0.3% against the Swiss franc but is down 0.6% relative to the loonie, 0.2% against the yen, Aussie dollar, peso and yuan. There were more rumors that the Peoples Bank of China may be intervening to counter yuan weakness.

Comex gold strengthened 0.5%, while West Texas Intermediate crude oil settled back 0.4% and at $44.08 per barrel is not far from reaquiring a “$43” handle.

Indonesian markets remain closed and will be so for the rest of the week. Elsewhere in the Pacific Rim, share prices declined 1.2% in Taiwan, 0.6% in Hong Kong and China, 0.5% in Japan and 0.4% in India and South Korea. Australian stocks were an exception, closing up 0.7%, but the bid tone continued in Europe where stocks are down 0.4% in Germany and 0.2% in France. U.S. stocks rose initially after having fallen on Tuesday.

Ten-year sovereign debt yields are up two basis points in Britain and one basis point in Japan but off three basis points in Germany.

German import prices in May highlighted the latest global light motif of deceleration, dropping a full percent on month and slowing to a 4.1% 12-month rate of climb from 6.1% in both March and April. Export price inflation fell to 2.2% from 2.6%.

Likewise, Italian consumer prices fell on month for the second consecutive time, dipping 0.2% in June, which depressed the on-year pace to just 1.2%. Italy’s PPI dropped 0.3% in May, knocking 1.1 percentage points off the 12-month rate of rise, which is now 2.8%.

Brazilian PPI inflation slowed 0.8 percentage points to 2.26% in May.

Spanish retail sales growth was more than halved to a 0.3% monthly rise in May. But Irish retail sales volume increased 0.8% in May and doubled to a 3.3% year-over-year advance.

The UBS Swiss consumption indicator moved up 0.05 points to 1.39 in May, but April’s value was revised down 0.14 points. Both the April and May levels are lower than any of the first-quarter monthly levels.

Euroland M3 money advanced 5.0% between May 2016 and May 2017 and posted on-year growth averaging 5.1% in March-May. Lending growth to firms and households remained subdued at 2.4% and 2.6%.

On a brighter note,

  • Austria’s manufacturing purchasing managers index climbed 2.7 points to a 72-month high of 60.7 in June.
  • Small business sentiment in Japan moved closer to the neutral “50” level in June with a reading of 49.2. March’s 50.5 score is the only reading above 50 so far this year.
  • Britain’s Nationwide house price index, which had recorded three monthly drops in a row, jumped 1.1% in June, lifting the on-year increase to a 3-month high of 3.1%.

The advanced estimate of the U.S. goods and services trade deficit in May is $65.9 billion, somewhat smaller than April’s shortfall of $67.1 billion. U.S. mortgage applications dropped 6.2% last week. Still to come is the release of pending home sales.

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

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