Softer Dollar on the First Day After the Fed’s Rate Hike
December 20, 2018
Markets did not take comfort from Wednesday’s FOMC interest rate hike or the upbeat economic prognosis of Chairman Powell. The dollar fell overnight by 0.6% against the euro, 0.5% relative to the yen and Swiss franc, 0.4% vis-a-vis sterling, 0.3% versus the Australian dollar, and 0.2% against the yuan and loonie.
Share prices fared poorly in the Pacific Rim and Europe overnight, dropping 0.9% in Hong Kong and South Korea, 1.3% in Australia, 0.9% in Switzerland, 0.5% in China, and at least 1.0% in Germany, France, Italy, and Spain. U.S. stocks had weakened sharply yesterday during and after Powell’s press conference. Ironically, decisions by a number of other central banks today leave policies unchanged didn’t help equities either. Stocks fell 2.8% in Japan, 1.1% in Taiwan, 0.8% in the Czech Republic, 0.5% in Indonesia, and 0.2% in Great Britain. And in Sweden following the first central bank rate hke since July 2011, stocks show a drop today of 1.6%.
The U.S. stock market has also opened lower, contrary to futures indications earlier in the day.
Ten-year British gilt and Japanese JGB yields slid a basis point, whereas the 10-year U.S. Treasury yield recouped a two basis points from yesterday’s big drop.
WTI oil is down 2.9%, while gold is little changed.
Japanese monetary policy remained static at the Policy Board’s final review of 2018, with targeted overnight and 10-year JGB rates left at minus 0.1% and “around zero percent” as they’ve been since early 2016. A released statement also made no modifications to other elements of the policy stance like plans to buy about 80 trillion yen of JGBs per year. Officials continue to believe the baseline forecast of moderate economic growth, powered by a virtuous cycle of rising income and spending. This will extend Japan’s already positive output gap and eventually lift core inflation near to the 2% objective. In press conference, Governor Kuroda acknowledged rising external risks but said they so far have exerted only a limited impact on Japan’s economy.
The Bank of England had undertaken two 25-basis point interest rate hikes earlier in November 2017 and August 2018 but this time kept the 0.75% current rate level unchanged by a unanimous vote. A released statement observes softer global growth, more serious potential downside risks, tighter financial conditions, more intense Brexit uncertainties, and falling oil prices that are likely to push British inflation under 2.0%. Forward guidance advocates that “an ongoing tightening of monetary policy over the forecast period, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2% target at a conventional horizon” but adds, “The monetary policy response to Brexit, whatever form it takes, will not be automatic and could be in either direction.”
The Central Bank of the Republic of China (Taiwan) conducted a quarterly policy review that left the discount rate unchanged at 1.375%. That’s been the level since four consecutive cuts of 12.5% ending in mid-2016. The central bank’s statement after the decision speaks of lessening global growth, more moderate domestic economic activity, mild inflation, and amplified international economic and financial uncertainties as it makes the case for maintaining an accommodative policy stance.
The Swedish Riksbank Executive Board raised its repo rate from -0.50% to -0.25%, marking the first rate hike since July 2011 and the first change since a 15-basis point cut in February 2016. The rate has been zero percent or lower since October 2014. A statement from the Board doesn’t anticipate another rate hike until the second half of next year and thereafter looks for a pace of two likely increases per year. Today’s first upward step was made in the context of higher inflation and expected inflation as well as strong Swedish growth, but note is made that inflation nonetheless remains lower than officials were expecting. Projected inflation next year was lowered even though economic growth was also revised downward.
Tightening monetary policy by Bank Indonesia was paused this month, with the 7-day reverse repo rate being maintained at 6.0%. It had been earlier raised six times between mid-May of last year and November 2018 by a total of 175 basis points from 4.25%. Inflation of 3.25% remains within the 2.5-4.5% target corridor, but officials have been compelled to reduce Indonesia’s current account deficit and to protect the rupiah, which has fallen extensively in 2018. The currency stabilized in November but has encountered some renewed pressure this month.
The Czech National Bank began a policy of rate normalization in August 2017 that in seven steps including one of 25 basis points last month had lifted the two-week repo rate from 0.05% to the present level of 1.75%. By a 5-2 margin, the central bank Board decided to keep a 1.75% level, with the two dissenters favoring another hike. A statement explains,
GDP and prices are rising at a slower pace than forecasted, whereas total wages are increasing somewhat faster. Lower observed inflation and the current external environment outlook, including a marked decline in oil prices, are anti-inflationary risks. On the other hand, the current and future evolution of the koruna exchange rate is an inflationary risk. There is still uncertainty stemming from the growth in protectionist measures in global trade and the manner of exit of the United Kingdom from the European Union.
Among data released today, investors learned that
GDP in New Zealand grew only half as much (0.3%) last quarter as anticipated. On year grotwh slowed to 2.6% from 3.2%.
New Zealand’s trade deficit shrunk to NZD 861 million in November versus NZD 1.317 billion in October and NZD 1.222 billion in November 2017.
Switzerland’s trade surplus widened to a 22-month high of CHF 3.07 billion in November, but the year-to-date surplus of CHF 17.5 billion was 18% smaller than a year earlier.
Great Britain’s distributive trades index dived below zero to a reading of -13 in December, lowest since October of last year, from +19 in November.
British retail sales revived more strongly than expected in November, climbing 1.2% on month excluding auto fuel (3.8% from a year earlier).
Euroland’s current account surplus in October widened to EUR 23.0 billion from EUR 17.6 billion in September due to a 1.5% contraction of imports. The surplus has equaled a robust 3.0% of GDP over the past twelve reported months, but the distribution among member countries has been very unequal.
Japan’s all industry index, a monthly proxy of GDP, rebounded 1.9% in October from a 1.0% September slide. The index had fallen 0.8% last quarter and was only 2.3% greater in October than a year earlier.
The Conference Board index of euro area leading economic indicators was unchanged in November.
Italian PPI inflation cooled to 4.5% in November from 5.8% the month before.
In the U.S., the Philly Fed regional manufacturing index lost another 3.5 index points to a 28-month low of 9.4 this month versus 12.9 in November and 22.2 in October. New jobless insurance claims last week of 214K trimmed the four-week average by almost 3K to 222K.
On-year growth in Mexican retail sales of 3.0% in October was a percentage point less than expected.
Copyright 2018, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Bank Indonesia, Bank of England, Bank of Japan, Central Bank of the Republic of China, Czech National Bank, Euroland current account and index of leading economic indicaors, Japanese all-industry index, Swedish Riksbank