Stronger Dollar

July 16, 2019

The dollar strengthened overnight by 0.9% against sterling, 0.6% relative to the peso, 0.4% versus the euro and Swiss franc, 0.3% vis-a-vis the yen, 0.2% against the Aussie dollar and 0.1% versus the kiwi. In other euro cross-rate developments, sterling weakened to a half-year low against the common currency, but the Swiss franc is hovering around its strongest level in two years.

The 10-year U.S. Treasury yield advanced three basis points, but U.S. equities are treading water unlike European share prices which are rising. Stocks in Europe are up so far by 0.7% in France, 0.5% in Spain, Switzerland, and the U.K., and by 0.3% in Germany and Italy. In Asia, equities fell 0.7% in Japan and 0.2% in China but appreciated 0.6% in India, 0.5% in South Korea and 0.4% in Singapore.

Gold has firmed 0.4%, while WTI oil is 0.1% softer.

A lot of Fed officials are speaking publicly today including Chairman Powell, but the message isn’t quite uniform. Powell has encouraged speculation that a rate cut will occur soon. Atlanta Fed President’s comments favored a more wait-and-see approach.

Released U.S. economic data do not paint an economy heading into recession. While industrial production stagnated in June, marking the fifth month of the first half of 2019 in which such did not rise more than 0.1%, retail sales growth in June of 0.4% on month beat expectations, and so too did the NAHB housing market index, which rebounded to a 2-month high. U.S. import prices swooned 0.9% in June, marking the first monthly drop of 2019 as imported fuel costs dived 6.5%. Dollar strength is also depressing non-fuel import prices, such that the overall 2.0% 12-month drop in import prices was the biggest decline in 34 months. If the Fed does cut rates soon, the main motivation is likely to be the persistent undershooting of inflation rather than worries about insufficient growth.

In other central banking news, minutes from the Reserve Bank of Australia’s July meeting in which the benchmark interest rate was cut at a second straight meeting (to 1.0%) reveal a willingness to ease monetary even further if required to lift growth and inflation back to desired trends. The reductions at the June and July Board meetings were the first back-to-back easings since 2012.

There’s been some bearish news out of Europe. The ZEW index of investor expectations concerning Germany’s economy sank 3.4 points in July to a nine-month low and was accompanied by an 8.9 plunge in perceived current conditions to the first sub-zero reading in over a year. The ZEW expectations index for the whole euro area fell to a 6-month low and was accompanied by a 3-month trough in the measure for current conditions.

Separately, Euroland’s index of leading economic indicators fell 0.3% for a second straight month¬† in June. And British labor market statistics revealed an acceleration of wage inflation and higher unemployment. On the British political front, the on-going contest to select a new leader of the Conservative Party has veered to a harder line on Brexit, that is a greater inclination to leave the EU without any negotiated terms.

Euroland’s seasonally adjusted trade balance widened to a 3-month high surplus of EUR 20.2 billion in May, but a 1.4% rebound in exports only reversed part of a 2.5% plunge in April.

Italian CPI inflation was revised downward by 0.1 percentage point to 0.7% in June. That’s a 14-month low.

Turkish unemployment fell a full percentage point to 13.0% in May, its lowest level of 2019 but still 3.4 percentage points higher than in May 2018.

Consumer prices in New Zealand went up 0.6% on quarter in 2Q. On-year inflation of 1.7% lay midway between 1.5% in the first quarter and 1.9% in the second half of 2018.

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

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