Eight More Central Bank Meetings, a U.S. Current Account Report, and Downgraded Global Growth
September 19, 2019
Dollar movement overnight was mixed, with gains against the Australian dollar, kiwi, sterling, and yuan but losses relative to the yen, Swiss franc, euro, loonie and peso.
The 10-year U.S. Treasury and Japanese JGB yields fell three basis points. Their German and British counterparts are respective a basis point higher and a basis point lower.
In stock market action, there were advances Thursday of 1.1% in Hong Kong, 0.5% in South Korea, Australia and China, and 0.4% in Japan, balanced by daily losses of 1.3% in India, 0.5% in Indonesia, and 0.3% in Taiwan. In Europe, markets in Germany, France and the U.K. have each posted moderate gains so far today.
The price of WTI oil jumped 2.2%, while that of Comex gold slipped 0.4%.
The U.S. current account deficit narrowed to a 3-quarter low of $128.2 billion last quarter, no thanks to $6.5 billion further increase of the merchandise trade imbalance. Expanded net investment income was the main reason for the current account deficit’s decline. The deficit as a percent of GDP fell to an easily manageable 2.4% from 2.6% in the first quarter.
The OECD revised projected global GDP growth downward to 2.9% this year from 3.2% predicted last May and to 3.0% in 2020 from a prior projection of 3.4%. The national forecasts for the U.S., China, Euroland, and Great Britain were each revised lower.
Slower global growth largely due to intensifying trade frictions also featured prominently in a slew of monetary policy reviews reported today.
Officials at the Swiss National Bank‘s quarterly meeting retained a sight deposit rate of minus 0.75% and reaffirmed their commitment to intervene in the foreign exchange markets on an as-needed basis in order to counter upward pressure on the still-overvalued franc. Once more, the forecast path of CPI inflation was lowered due to weaker economic growth and a stronger franc. Inflation is not projected to exceed 0.3% through end-2020 and will not break above 1.0% until the spring of 2022. A technical modification has been unveiled in calculating the portion of each bank’s sight deposits head with the SNB that are subject to the negative interest rate.
At the Bank of England, the Monetary Policy Committee kept the Bank Rate unchanged at 0.75%, made no changes to the ceilings on quantitative stimulus, and left its forward guidance very ambiguous. The U.K. economy not only faces the headwinds of slower global growth and intenser trade strains, but also anxiety and uncertainty surrounding the terms, timing, and overall effect of the government’s attempt to leave the European Union. Recent adverse developments in all of these areas suggest that low interest rates will likely prevail in the U.K. for longer than imagined previously. The MPC decision today was unanimous. Officials earlier authorized two 25-basis point hikes of its Bank Rate, which were done in November 2017 and August 2018.
The Bank of Japan Board’s long-time waiting-for-Godot show continued at this month’s policy review. Officials left the policy interest rate unchanged at -0.10%. For what seems like an eternity, they’ve met monthly, hashed over all policy considerations — this time for a total of four hours and 39 minutes — and emerged with the view that GDP will continue advancing moderately and that it’s only a matter of time, albeit much longer than imagined initially, before core inflation, which is currently around 0.5%, eventually climbs toward the 2% target. These meetings never seem to change anybody’s minds. Officials once again split 7-2 to keep policy very accommodative, not only with a negative marginal short-term interest rate but by purchasing JGBs so that the 10-year yield stays around zero percent. Kataoka and Harada have been more dovish than the 7-person majority on the Board. Today’s statement does concede that business sentiment and export demand have been dampened lately by global factors.
At Bank Indonesia, a third consecutive 25-basis point cut was announced today in the seven-day reverse repo rate, which becomes 5.25%. Overnight lending and deposit rates were similarly cut by a quarter percentage point. Like the reductions at meetings in July and August, today’s as-expected preemptive action is meant to promote sustained growth with external stability. With the rupiah firmer, inflation low, and Indonesian money market liquidity adequate, it was felt appropriate to cut the rate again amid more intense global headwinds that are likely to result in GDP growth at the lower end of its expected range. The 75 basis points of easing since midyear almost reverses half the 175 basis points of tightening done last year.
Officials at the Central Bank of the Republic of China (Taiwan) agreed unanimously to continue their accommodative monetary policy , citing muted domestic inflation, a slight continuing output gap, a stable inflation outlook, and elevated economic and financial uncertainties around the world. The discount rate has been 1.375% since the last of four 12.5-basis point cuts administered between September 2015 and June 2016. Today’s statement gives a hint of possible further monetary stimulus in the future, saying that the impact of the uncertainties is being monitored carefully and pledging to act timely as appropriate.
Norway has the only central bank in the Group of Ten that’s still raising interest rates. A fourth 25-basis point policy rate hike was engineered today at the Bank of Norway, following earlier such increases in September 2018 and March and June of this year. That said, officials today strongly suggested that this string of hikes may be over in light of global uncertainties and slightly lower-than-assumed inflation in Norway and less labor market tightness than had been foreseen at the last full review in June.
The repo rate of the South African Reserve Bank was left unchanged by unanimous consent at 6.50%. Such had been cut by 25 basis points in July, reversing a hike of 25 bps in November of 2018. Officials “welcomes the sustained moderation in inflation outcomes and the fall in inflation expectations of about one percent since 2016. The Committee would like to
see inflation expectations also anchored closer to the mid-point of the inflation target
range on a sustained basis….In this persistently uncertain environment, future policy decisions will continue to be highly data-dependent, sensitive to the assessment of the balance of risks to the outlook, and will seek to look-through temporary price shocks. ”
Late Wednesday came announcement that Copom, the monetary policy committee at Brazil’s central bank, engineered its second 50-basis point interest rate cut of 2018, but this was only the latest in an extensive easing cycle. The Selic rate was at 14.25% prior to October 2016, 875 basis points higher than the new level. All but 200 basis points of that easing was done in 2017. A statement released after this week’s unanimous decision to reduce the rate foresees a gradual economic recover and a convergence of inflation on target next year. The economy has plenty of slack, balanced risks, and sub-4% expected inflation. Future changes in monetary policy will be data-dependent.
Key data reported today included the following items:
- Japan’s all industry index, a monthly supply-side proxy for GDP, rose 0.2% in July. Such had fallen 0.5% in the first quarter and then rose 0.5% in the second quarter.
- Australia’s jobless rate rose 0.1 percentage point to a one-year high of 5.3% in August despite jobs growth of 34.7k last month.
- British core retail sales fell 0.3% in volume terms last month and recorded a smaller 12-month 2.2% rate of increase.
- Real GDP growth in New Zealand slowed to a 3-quarter low of 0.5% in 2Q, depressing the on-year growth rate to 2.1% from 2.5% in 1Q and 3.2% in the second quarter of 2018.
- Euroland’s seasonally adjusted current account surplus widened 12% on month in July but, at EUR 20.5 billion was EUR 9.7 billion less than May’s level. Over the 12 months through July, the current account averaged 2.7% of GDP, down from 3.3% in the previous 12 months through July 2018.
- The Swiss trade surplus in August of CHF 1.153 billion was the smallest in 19 months, but the year to August accrued surplus of CHF 15.9 billion was 43% wider than that in the first eight months of 2018.
- Dutch consumer confidence fell to a 4-month low of -2 in September.
- The U.S. Philly Fed manufacturing index dropped 4.8 index points to a 3-month low in September of +12. U.S. new jobless insurance claims remained very low at 208k last week. U.S. existing home sales rose 1.3% on month and 2.6% on year in August. And the Conference Board index of U.S. leading economic indicators posted no changed for the second time in three months during August.
Copyright 2019, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Bank Indonesia, Bank of England, Bank of Japan, Bank of Norway, Central Bank of Brazil, Central Bank of the Republic of China (Taiwan), South African Reserve Bank, Swiss National Bank, U.S. current account
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