Policies Driving Currency Markets as More Evidence Emerges of Slower Global Growth

February 13, 2019

Industrial Production in the euro area fell 0.9% in December, more than double the expected slide after a 1.7% drop recorded in November. This resulted in a 4.2% 12-month rate of decline, the biggest on-year contraction since November of 20o9. December output among the common currency bloc’s five largest economies fell from end-2017 levels by 3.9% in Germany, 1.7% in France, 3.5% in Italy, 6.7% in Spain and 4.2% in the Netherlands.

Germany’s index of leading economic indicators dropped 0.3% in December, and the index of coincident economic indicators was 0.4% lower that month.

Retail sales in Brazil fell 2.2% on month and rose just 0.6% on year in December. On-year growth at the end of 2018 was much less than the year’s average sales rise of 2.3%.

Retail sales in South Africa tumbled 4.8% in December, the biggest monthly plunge in 94 months, and that produced the first on-year decline of sales since February 2017.

South Korean unemployment climbed 0.6 percentage points in January to a nine-year high of 4.4%.

More evidence emerged that slower global growth is dampening inflation.

  • Import prices in Japan were 1.6% lower in January than a year earlier. That’s a stark contrast from on-year import price inflation of +9.5% in November and +12.3% last August. A 0.6% drop in domestic producer prices was the third straight month-on-month decline, leaving such just 0.6% above the level in January 2018.
  • U.S. consumer prices flat-lined in January for a third consecutive month, reducing its 12-month rate of increase to a 19-month low of 1.6% from 1.9% in December and 2.9% last June-July. Energy plunged 3.1% on month, and core CPI stayed at 2.2% for a third month in a row.
  • British consumer prices fell 0.8% last month, resulting in the lowest year-on-year inflation rate (1.8% versus 2.7% last August) in two years. Producer output price inflation of 2.1% in January was down from 2.4% in December and 3.0% in November. British house price inflation of 2.5% in December was down from 3.2% in September.
  • Romanian CPI inflation in January remained at December’s 1-year low of 3.3%.

In several ways government policy pronouncements have been influenced by the slowdown in global demand and lessening inflation outlook. Loretta Mester is the latest Fed official to endorse a less aggressive stance on reducing the U.S. central bank’s balance sheet.

President Trump has become less inclined to rock the boat on two fronts. Noting ongoing progress in U.S.-Sino trade talks, he indicated that lack of a full deal by March 1st may not lead to steep tariff hikes immediately thereafter. Also, while expressing dissatisfaction with the details of the congressional border security agreement and vehement criticism of such by extremely conservative media commentators, the president seems to be inclined to sign the bill by Friday.

The Bank of England has once again projected a big blow to British growth if the U.K. leaves the European Union with no Brexit deal. Prime Minister May appears running down the clock in hopes that Parliament faced with a choice of her already rejected arrangement or no deal at all will reverse its earlier decision.

The dollar rose 0.3% overnight against both the euro and yen. It is unchanged against sterling and down 0.3% versus the Aussie dollar, 0.2% relative to the yuan and Swiss franc, and 0.1% vis-a-vis the loonie.

Two currencies against which the dollar fell more sharply overnight are the kiwi and Swedish krona, and monetary policy statements in New Zealand and Sweden were responsible for the strength of those currencies.

The U.S. dollar lost 1.3% overnight against the kiwi. Officials at the Reserve Bank of New Zealand chose to retain a 1.75% Official Cash Rate. This was the 15th straight monetary policy review in which the interest rate benchmark was not moved, and a released statement reiterated that the next rate move could conceivably be either up or down in direction. However, officials disappointed investors by extending the baseline forecast of no likely rate change to 2020 as well as 2019. Softer global growth may be dampening demand for New Zealand exports, but officials are not feeling any pressure to cut the rate in response.

The Swedish krona depreciated 0.4% overnight against the dollar. The Swedish Riksbank has not had a positive repo rate since a 25 basis point cut to zero percent in October 2014. That had been followed by additional reductions of 10 basis points in February 2015 and July 2015 and of 15 bps each in March 2015 and February 2016. But at this past December’s review, the central bank executive board implemented its first rate increase since July 2011, lifting the repo rate from negative 0.50% to minus 0.25%. And a statement released after today’s ensuing policy review didn’t flinch from the earlier forward guidance that the next rate hike will likely occur during the second half of this year. “As in December, the forecast for the repo rate indicates that the next increase will be during the second half of 2019, on condition that the economic outlook and inflation prospects are as expected. The Executive Board assesses that the repo rate needs to be raised at a slow pace even after that, roughly twice a year by 0.25 percentage points on each occasion, for inflation to remain close to 2 per cent.”

Stock, commodity and fixed income market activity today reflect a somewhat greater appetite for risk. Ten-year sovereign debt yields are up 2 basis points in the U.S. and U.K. and by a basis point in Japan. Oil rose 1.8%. Share prices climbed 1.8% in China, 1.4% in Hong Kong, and 1.3% in Japan and are also showing gains in North America and Europe.

Copyright 2019, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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