Market Disturbances

May 3, 2018

Share prices fell late yesterday in the wake of an FOMC statement that reinforced the possibility of faster, rather than slower, rate hike normalization. Overnight in the Pacific Rim, Japan’s string of Golden Week holidays resumed with Constitution Day, but stocks elsewhere fell 2.6% in Indonesia, 1.4% in Hong Kong, 1.1% in Singapore, 0.6% in South Korea, and 0.5% in India. Exceptions to this downtrend were in China (+0.6%), Australia (+0.8%) and New Zealand (0.7%), but selling has also been the predominant mood in Europe. Share prices there show declines of 1.6% in Greece, 0.4% in Italy, 0.3% in France, Germany and Spain, and 0.1% in Great Britain.

Investors are also watching the talks in Beijing which purportedly are focused on trade policy but in fact appear to embody a much broader agenda that may determine the whole contentious U.S.-Sino relationship going forward into the 21st century.

The dollar began slipping after the FOMC statement was released and fell further overnight by 0.6% against the Australian and New Zealand currencies, 0.5% relative to the yen and peso, 0.3% vis-a-vis the loonie, 0.2% against the yuan and euro and 0.1% versus the Swiss franc and sterling.

Gold, which serves as a hedge against depreciation in the dollar and other paper money, rose 0.6%, while WTI oil edged 0.1% lower.

Ten-year German bund and British gilt yields settled back three basis points.

Two central banks held policy reviews, each resulting in no change in interest rates.

  • The Bank of Norway’s policy rate stays at 0.5%, but with forward guidance pointing to an initial rate hike sometime after the summer.
  • Monetary policymakers at the Czech National Bank kept the two-week repo rate steady at 0.75%. A discount rate of 0.05% and Lombard rate level of 1.50% remained steady, too.

The most interesting overnight data news concerned inflation in the euro area.

  • Inflation measured by the harmonized CPI unexpectedly dipped. Core CPI inflation dropped 0.3 percentage points to 0.7%, which compares with 1.0% in each month of the first quarter and 1.2% in April 2017. The services component of the CPI fell to 1.0% from 1.5%. Total CPI inflation only dipped 0.1 percentage point to 1.2%, although that too was well below the 1.9% on-year pace in the prior 12 months ending in April 2017. Energy inflation accelerated to 2.5% from 2.0%, while the food component went up 0.2 percentage points to 3.1%. ECB officials increasingly are paying more attention to underlying core CPI, not just the all-items data series.
  • Core producer price inflation for March also decelerated, slipping to 1.4% from 1.6% in February, 1.9% last December and 2.2% in October 2017.

More purchasing manager survey results got reported:

  • Non-oil Middle Eastern PMIs rose to a 5-month high of 50.1 in Egypt and a 2-month high of 55.1 in the United Arab Emirates but set a record low of 51.4 in Saudi Arabia.
  • The British services and composite purchasing manager indices rebounded to 2-month highs in April of 52.8 and 53.2. Inflation ebbed.
  • Russia’s manufacturing PMI revealed that operating conditions there improved at a faster pace than in March, as the index rose 0.7 points further above 50 to a reading of 51.3.
  • Ireland’s service-sector PMI climbed to a 3-month high of 58.4 in April from 56.5 in March. Irish service sector activity remains on a “firm footing.”
  • Australia’s AIG-compiled performance of services index settled back to a 2-month low of 55.2 after touching a 13-month high of 56.9 in March.

Australia recorded a A$ 4.034 billion trade surplus in the first quarter of 2018, helped by a much larger-than-forecast surplus of A$ 1.527 billion in March, which was its widest surplus in ten months.

Following weak results in December, January and February, Australian building permits rebounded 2.6% in March, lifting the on-year increase to 14.5%.

Retail sales in Hong Kong were 11.4% greater in March than a year earlier.

Turkey’s inflation problem keeps intensifying. On-year increases in April of 10.85% in the CPI and 16.37% in the PPI 0.6 and 2.1 percentage points greater than in March.

The U.S. posted a goods and services trade deficit of $48.956 billion in March, down from $57.7 billion the month before and the narrowest imbalance in six months. Exports rose 2.0% on month, while imports were 1.8% below February’s total.

The Canadian trade deficit, in contrast, widened sharply to C$ 4.140 billion in March from C$ 2.932 billion in February and just C$ 0.654 billion in March 2017. Imports surged 6.0% on month, almost twice the 3.7% increase in exports.

New U.S. jobless insurance claims remained historically low last week at 211K.

Growth in U.S. nonfarm labor productivity advanced 0.7% last quarter, lifting its year-on-year increase by 0.1 percentage point to 1.3%. That matches the 1.3% rise seen on average in 2017. Unit labor costs rose 2.7% on quarter, a shade less than forecast, and its on-year advance fell to 1.1% from 1.6% between the final quarters of 2016 and 2017.

Copyright 2018, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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