More Volatile Global Markets as Concern Mounts about Turkey

August 10, 2018

Turkey commands the spotlight of global financial markets this Friday. Talks broke down between the U.S. and Turkey over the latter’s continuing detention of an American evangelical pastor, which has prompted economic sanctions by the United States on an economy already gripped with upward spiraling inflation and a central bank interest rate near 18%.

The U.S. dollar soared today by about 12% against the Turkish lira, bringing its gain since April to more than 50%. This will impose a draconian burden on the service burden of Turkish foreign currency-denominated debt. Turkish President Erdogan addressed his people today, calling on them to sell dollars.

The U.S. currency has risen against developing country currencies on contagion fears. It’s up 1.5% versus the South African rand, 0.5% vis-a-vis the yuan and South Korean won, and 1.2% relative to the Mexican peso.

Against the currencies of developed nations, the dollar has risen 0.9% vis-a-vis the Australian dollar, 0.8% relative to the euro, and 0.4% vis-a-vis the loonie and sterling.

Swelling risk aversion has seen global equities and sovereign debt yields decline.

  • Stock markets dropped 1.3% in Japan, 0.9% in South Korea, 1.3% in Singapore, and 0.4% in Hong Kong, Taiwan, and India. European share prices are down 1.7% in Germany, 1.9% in Italy, 1.2% in France, 0.8% in Switzerland, and 0.6% in Great Britain.
  • Ten-year sovereign debt yields in the U.S., Germany, and U.K. dropped 3 basis points. But those in Italy and Greece climbed 4 and 7 bps.

West Texas Intermediate crude oil rose 0.5%, but gold is surprisingly little changed in value this morning.

Selling pressure on the Aussie dollar was amplified by the central bank’s quarterly Monetary Policy Statement, which bumped down projected inflation, predicted continuing low wage pressure and no return to full employment until late 2020, and all in all signaled no impetus to start normalizing the Official Cash Rate anytime soon.

In other central bank news, the Central Reserve Bank of Peru left its monetary policy interest rate unchanged as expected at 2.75%. Such had earlier been reduced by 150 basis points in increments of 25 bps in alternating months beginning in May 2017 and ending in this past March. A released statement from the BCRP Board observes in-target core inflation of 2.33% in July and predicts such will converge gradually on 2.0% by the end of this year. Expected inflation is contained, too.

Japanese data on GDP, producer prices and service sector activity were released.

  • Real GDP grew 1.9% at a seasonally adjusted annualized rate in the second quarter, snapping back from a 0.9% contraction (saar) in the first quarter yet leaving on-year economic growth at just 1.0%. Growth last quarter was driven by consumption and non-residential investment, while net foreign demand exerted a half-percentage point drag. The GDP price deflator was only 0.1% higher than a year earlier and unchanged from the first-quarter level.
  • Domestic private corporate goods prices in July increased 0.5%, raising its 12-month rate of increase to an 8-month high of 3.1%. Import price inflation of 11.5% was at a 9-month high.
  • Japan’s tertiary index fell 0.5% on month in June. This slashed the 12-month increase almost in half to 0.7%, but there still was a decent 0.8% 2Q-over-1Q increase.

Several British indicators including GDP were also released today.

  • In spite of a drag from net exports, real GDP climbed 0.4% last quarter, twice the pace of the first quarter, and resulted in a 1.3% increase from the second quarter of 2017.
  • British industrial production climbed 0.4% in June and 1.1% from a year earlier. Industrial production in the second quarter fell 0.8% on quarter, with factory output sliding 0.9%.
  • Construction output went up 1.4% in June and lifted the 12-month rate of increase to a 6-month high of 2.2%.
  • The goods and services U.K. trade deficit narrowed to a 4-month low of GBP 1.86 billion in June, helped by a 9.2% drop in the merchandise trade gap to GBP 11.38 billion. But the second-quarter total goods and services deficit of GBP 8.6 billion was more than twice the size of the first-quarter deficit.

Italy ran a EUR 5.07 billion trade surplus in June, 12.7% wider than a year earlier.

French industrial production rose 0.6% in June and 1.7% from a year earlier.

Consumer prices in the year to July increased 1.6% in Portugal (a 15-month low), 3.0% in Norway, 2.1% in Sweden, 1.1% in Denmark, and 4.6% in Romania. Greek import price inflation accelerated to 11.6% in June from 9.9% in May. and Norwegian producer prices were 22.6% greater than in July 2017. Protectionism is inflationary.

Turkey posted a $2.97 billion current account deficit in June, which was the smallest shortfall in ten months. The deficit had swelled to 5.5% of GDP in 2017 from 2.8% of GDP in 2016.

Indonesia’s $8.028 billion current account deficit last quarter was 71% wider than a year earlier and equal to 3.0% of GDP.

Real GDP in Hong Kong contracted 0.2% in the second quarter, reducing on-year growth by 1.1 percentage points to 3.5%.

New Zealand’s manufacturing purchasing managers index dropped 1.6 points to a 7-month low of 51.2 in July.

Canada’s unemployment rate declined 0.2 percentage points in July, and employment rose by a hefty 54.1K in the month. But growth in jobs was skewed toward part-time workers in the public sector. Private employees only grew 5.2K, and self-employed workers dipped 0.7K.

As expected, U.S. consumer prices rose 0.2% last month. That was the third 0.2% advance in four months and left the 12-month consumer price inflation rate at 2.9%. Energy slipped 0.5% but was 12.1% greater than a year earlier. Core CPI inflation edged up 0.1 percentage point to 2.4%. There’s nothing in these data to stop the Fed from tightening twice more in 2018.

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

 

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