Political Fireworks but Markets Calm, Awaiting FOMC Announcement

November 8, 2018

U.S. Attorney General Sessions is out and will be replaced by someone critical of the Mueller investigation. President Trump wasted little time adopting a very confrontational stance to the Democratic majority in the House.

The FOMC is not expected to hike interest rates today. No press conference is scheduled, but expectations are widespread that there will be further tightening at the December meeting.

The dollar fell 0.2% against the euro but rose 0.4% relative to sterling, 0.2% vis-a-vis the yuan and 0.% against the yen.

Italy’s 10-year sovereign debt yield climbed six basis points, and that country’s stock market has dropped 0.6% today. The U.S., German and Japanese ten-year yields are little changed. The British gilt is 2 bps firmer.

Japan’s Nikkei advanced 1.8% today, and share prices also climbed 0.9% in Singapore, 0.7% in South Korea, 0.6% in Indonesia, 0.5% in New Zealand and Australia, and 0.4% in Hong Kong.  China’s market slipped 0.2%, however. The German Dax is down 0.2%, while the British Ftse has risen 0.3%.

Gold declined 0.4%, and oil is 0.2% firmer.

There’s been more evidence of the strain of trade tensions on Japan and Germany.

  • Japan’s current account surplus narrowed to JPY 1.822 trillion in September from JPY 2.258 trillion a year earlier and to JPY 1.334 trillion on a seasonally adjusted basis from JPY 1.429 trillion in August.
  • Japanese core domestic private machinery orders plunged 18.3% in September and were 7% lower than a year earlier. Foreign orders for machinery also declined by more than 10% on month.
  • Although Japan’s economy watchers index improved to a 9-month high, the reading remained below the 50 level, and the outlook component weakened to a 3-month low.
  • Seasonally adjusted German merchandise exports and imports fell 0.8% and 0.4% on month in September. The monthly average trade surplus in the third quarter of EUR 17.2 billion was down from EUR 20.3 billion per month in the first half of 2018, 20.4 billion euros per month in 2017 and EUR 20.7 billion in 2016.

France posted a EUR 1.918 billion current account deficit in September, similar to a deficit in August of EUR 2.076 billion. The deficit equaled 0.8% of GDP in 2017.

Spanish industrial production dropped 0.7% in September and was 0.1% smaller than a year earlier.

China’s trade surplus widened to a four-month high of $34.0 billion in October. On-year growth in imports of 21.4%, however, exceeded the 15.6% rise in exports.

The Reserve Bank of New Zealand’s Official Cash Rate was left unchanged at 1.75%, its level since a 25-basis point cut in November 2016. A released statement reiterated that future policy decisions would continue to be data-dependent. Core CPI is still lower than the 2% target midpoint even though the labor market is quite tight. Officials see downside growth risks but upside inflation risks, and they pledged to “keep the OCR at an expansionary level for a considerable period to contribute to maximizing sustainable employment, and maintaining low and stable inflation.”

The National Bank of Serbia’s key policy rate was left unchanged at 3.0%, its level since a pair of 25-basis point cuts in March and April of this year. A released statement observed strong GDP growth by low and in-target inflation. Officials feel that caution is warranted because of the presence of global tensions and other external circumstances.

Bank Negara Malaysia’s overnight policy rate was kept at 3.25%. A 25-basis point hike to that level back in January reversed a similar-sized cut done in July 2016. A released statement observes downside growth risks from trade tensions, but inflation this year has been low. Energy developments will lift inflation next year, although core price pressure is expected to remain contained.

A summary of the most recent Bank of Japan Policy Board meeting observes that inflation remains weak and likely to rise only gradually and maintains the an ultra-loose policy stance is still necessary. However, officials are paying more attention to possible adverse effects on the money market from the policy stance.

The British house price balance index compiled by the Royal Institute of Chartered Surveyors declined to -10% from -2% in October. That’s its lowest level since October 2012.

An on-year drop of 1.0% in South African industrial output in September was the largest since February.

In the year to October, consumer prices rose 0.9% in Ireland and 3.8% in Hungary.

Canadian housing starts and U.S. weekly jobless insurance claims data will be reported later. But the main event will be the wording of the FOMC statement due this afternoon.

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

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