Decision Day in America

November 6, 2018

Market behavior today has been unremarkable, as investors around the world wait to see which vision of America has prevailed. The dollar has dipped 0.1-0.2% against the euro, Swiss franc, yuan, and Canadian, Aussie and New Zealand dollars. there’s been a 0.3% drop against the peso and sterling but a 0.1% uptick relative to the yen. Share prices are mostly up, with declines of 0.9% in the U.K., 0.7% in Taiwan, and 0.2% in China being exceptions. Ten-year sovereign debt yields are unchanged in the U.S., Germany and Japan but up 6 bps in Italy, 4 bps in Greece, 0.3 bps in the U.K. and 2 bps in Spain. Oil and gold fell 0.9% and 0.2%.

U.S. economic fundamentals have performed well lately. The dollar is supported with the strongest 2-quarter GDP growth in four years, inflation back to but not above the Fed’s target, wage growth back above 3.0%, widely attractive short-term interest rate differentials, and all this contrasting with soft growth, low inflation, and accommodative monetary policy forward guidance in Europe and Japan. Europe faces existential threats from Brexit, Italian fiscal policy, a menacing Russia, and a less reliable partner across the Atlantic. Japan can’t get out of its deflationary way, and like its Asian neighbors, would be vulnerable if Chinese growth falters or the U.S.-Sino trade war intensifies.

Central bank policy reviews in Australia and Romania yielded as-expected decisions not to change monetary settings.

  • The Reserve Bank of Australia’s Official Cash Rate has been at 1.5% since a 25-basis point cut in August 2016. This has been the longest interval without any rate change. A released statement from the Board upgraded projected growth slightly but also predicts a slow rise of inflation from a low base toward target. “the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.  …The Australian dollar remains within the range that it has been in over the past two years on a trade-weighted basis, although it is currently in the lower part of that range.”
  • At the National Bank of Romania, the monetary policy rate was left at 2.5% and will continue to be flanked by a 1.5% deposit rate and a 3.5% overnight lending rate. Inflation accelerated in September but is projected to settle back to the target ceiling by end-2018 and to hover in the upper half of the target range next year. Two 25-basis point increases in the first half of this year reversed half the easing implemented during the first five months of 2015.

Euroland producer prices advanced 0.5% in September, lifting the 12-month rate of increase by 0.2 percentage points to 4.5%. That’s up from 1.8% in April, but this acceleration mostly reflects energy, whose on-year pace rose from 3.4% to 12.7%.

European PMI data reported today and German industrial orders underscored a softening trend in growth.

German orders rose 0.3% on month, dampened by a 1.4% decline in foreign demand. The 12-month rate of decline in orders steepened to 2.2% in September from 1.8% in August.

Euroland’s composite PMI fell a full point to a 25-month low in October, pointing to intensifying weakness in the final quarter of 2018. Business sentiment is around a 4-year low.

Service-sector PMI’s were at a 20-month low in Euroland, a 29-month low in Italy, a 7-month low in Ireland, and a 3-month low in Germany. Composite PMIs dropped to a 59-month low in Italy, a 7-month low in Ireland, and a 5-month low in Germany. Conditions are now improving more rapidly in France than Germany, and such Italy experienced outright deterioration in the latest month.

Russia’s services and composite purchasing manager indices rose to 11- and 10-month highs of 56.9 and 55.8 in October.

Brazil’s services and composite PMI readings in October were at 8- and 7-month highs, but with each at 50.5, connoted scantly improving conditions.

Sweden’s service-sector PMI dropped 0.3 points to a 14-month low of 56.3 in October.

British same-store sales were only 0.1% higher than a year earlier in October.

Filipino CPI inflation stayed steady at 6.7% in October, several percentage points higher than target.

Also in the year to October, consumer prices went up 3.5% in Russia and 2.1% in the Netherlands. Each of those figures represented slight acceleration.

Mexican consumer confidence, which had edged down marginally in August and September following a steep improvement in July after NAFTA was refashioned, edged up 1.1% in October.

The U.S. IBD/TIPP optimism index, a composite gauge of consumer, investor and worker confidence, slid 1.4 points to 56.4 in November, which is a 2-month low.

The U.S. Labor Department’s JOLTS survey, a monthly indicator, revealed fewer job openings, hires and separations in September than August.

Canadian building permits rose 0.4% in September, following declines in each of the prior months totaling almost 4%.

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

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