Dollar Strengthens but Stock Market Rebound Short-lived

October 17, 2018

The dollar rose overnight except against the yen, which kept pace. Assorted dollar gains amounted to 0.6% vis-a-vis sterling, 0.4% versus the euro and peso, 0.3% relative to the Swiss franc, kiwi and Aussie dollar, and 0.2% against the loonie and yuan.

Except in India, whose stock market closed down 1.1%, share prices in the Pacific Basin followed Tuesday’s U.S. lead, advancing by 1.3% in Japan and New Zealand, 1.2% in Australia, Indonesia and Singapore, 1.0% in South Korea and 0.6% in China. Hong Kong’s market was closed for the Double Ninth Festival, which falls on the ninth day of the lunar year and serves as an ancestral memorial.

Stock market selling pressure resumed in Europe and, according to futures trading, will carry over into North America. Equities are down 1.1% in Greece, 0.6% in Italy and Spain, 0.5% in Germany, and 0.2% in Switzerland and France. The British Ftse is 0.2% firmer.

The anxiety-ridden global mood got more reinforcement the following developments:

  • Italy’s common currency partners are preparing a response to the Italian government’s defiantly stimulative budget proposal.
  • Contrary to the negative world reaction to the disappearance and presumed dismemberment of Saudi journalist Khashoggi after entering the Saudi consulate in Turkey, President Trump expressed skepticism about allegations that the Saudi government authorized and carried out the act.
  • President Trump also ramped up his criticism of the series of Federal Reserve interest rate hikes, calling continuing tightening ridiculous in the face of low inflation and the “biggest threat” to U.S. growth. Trump also subtly questioned the wisdom of monetary policy being handled independently from other government policies.
  • Sources claim that Robert Mueller’s wide-ranging investigation into Russian attempts to influence the 2016 election is nearing completion with the 2018 mid-term election now less than three weeks away. Polls indicate that the distance between the Democrats and Republicans has narrowed in the wake of the polarizing Kavanaugh hearings.
  • The governor of Malaysia’s central bank argued in favor of the possible use of capital controls in emerging Asian economies to dampen capital market volatility caused by external factors like Fed tightening and U.S. protectionism.

Ten-year sovereign debt yield differentials within the euro area widened, as that in Italy rose 5 basis points while those in Germany and France dropped by 3 basis points. The British 10-year gilt yield dropped 4 basis points, and the U.S. Treasury yield dipped a basis point. Japan’s 10-year JGB is unchanged.

West Texas Intermediate crude oil slipped 0.6% to $71.52 per barrel. Comex gold is 0.2% softer at $1,228.90 per troy ounce.

August U.S. Treasury-compiled capital flow data highlight a strong balance of payments, with net capital flows easily sufficient to finance the current account deficit. The long-term private net inflation totaled $131.8 billion in August and roughly $200 billion in July-August. A broader aggregate of short-term as well as long-term capital movements into the U.S. also put August’s net inflow above $100 billion and the 4-month total in May-August above $485 billion. In the short run at least, the U.S. blustery trade policy is damaging the rest of the world’s economy a lot more than America’s. The three main long-term risks of higher U.S. inflation, fewer geopolitical allies, and destroyed U.S. dollar hegemony are yet to be felt.

British consumer prices went up by a smaller-than-forecast 0.1% in September, reducing the 12-month rate of increase by 0.3 percentage points to a 3-month low of 2.4%. Core CPI inflation settled back 0.2 percentage points to 1.9%, which matches the level in both June and July before August’s spike. Retail price inflation dropped 0.2 percentage points to 3.3%, also unshooting expectations. Producer output price inflation rose 0.2 percentage points to 3.1% in September, while producer input inflation in the U.K. jumped 0.9 percentage points to a double-digit 10.3%. Finally, the government’s house price index posted a 3.2% on-year advance in August, right in the middle of its 3.0-3.4% range since May.

Chinese bank lending picked up as expected to 1.38 trillion yuan in September, a 2-month high. On-year growth in M2 money accelerated marginally to 8.3% as analysts were expecting. Growth of 4.0% in M1 rose slightly to 4.0%, but M0 growth, the narrowest money aggregate, slowed to the lowest pace so far in 2018.

Euroland consumer price data and construction output figures were reported:

  • On-year CPI inflation was confirmed at 2.1% in September, same as in July but down from 2.0% in June and August. Energy, up 9.5%, accounted for about 43% of the 2.1% figure. Non-energy consumer prices went up 1.3%, same as the 12-month increases posted in August as well as September 2017. Excluding food as well as energy, the core inflation rate stayed level at 0.9% in September and was even lower than 1.1% in the year through September 2017. Inflation last month had a “2” handle in Germany, France, Spain, and Belgium but a “1” handle in Italy, Greece and The Netherlands.
  • Construction output, which had risen 1.5% in the second quarter, contracted 0.5% on month during August, its second slide in a row. On-year growth of 2.3% in July-August was down from 2.7% in the second quarter.

Turkish retail sales and industrial production posted on-year increases of 1.3% and 1.7% in August. Both increases were smaller than those in July.

South African retail sales rose 0.6% on month and 2.5% on year in August, surpassing market expectations.

Singapore’s SGD 3.685 billion trade surplus in August was 45% smaller than July’s and the second smallest to be reported in the last ten months. The U.S.-Sino trade dispute is rattling a lot more commerce than between just those two countries.

U.S. housing starts fell 5.3% last month and were just 3.7% greater than a year earlier. Building permits dipped 0.6% on month and 1.0% on year. The 30-year fixed U.S. mortgage rate rose five more basis points last week to 5.10% and was associated with a 7.1% week-on-week decline in mortgage applications.

Twenty-five minutes after today’s open, the Dow Jones Industrials Average was trading down 155 points on the day for a net drop over the past two weeks of 4.4%.

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

 

 

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