Sharp Equity Declines but Mixed Dollar

August 20, 2020

The U.S. equity market correction triggered by downbeat FOMC minutes┬áreleased yesterday afternoon set the tone for overnight losses in European and Asian markets where bourses tumbled 3.7% in South Korea and 3.3% in Taiwan and by at least 1.0% in China, Hong Kong, Japan, Singapore, India, Germany, France, Italy, U.K., and Spain. Indonesia’s market did not open today to observance of the Islamic New Year.

Federal Open Market Committee minutes from the July 28-29 meeting concluded that recoveries in U.S. GDP and the labor market during the second half of 2020 would be “somewhat less robust” than believed earlier. U.S. data released at 08:30 EDT today underscored the more cautious view.

  • New jobless insurance claims, which in the week of August 8, had dipped under the one million mark for the first time in 21 weeks, unexpectedly climbed back to 1.106 million filings last week.
  • The Philly Fed manufacturing index settled back for a second straight month. After jumping to a reading of 27.5 in June from -43.1 in May, such dropped to 24.1 in July and by more than forecast to 17.2 this month.

Just prior to those two reports, the dollar was showing overnight advances of 0.6% against the Australian and New Zealand dollars and 0.5% relative to the Mexican peso but losses of 0.5% against the Swiss franc, 0.3% versus sterling and 0.1% vis-a-vis the yen, euro, loonie and yuan.

Greater investor aversion to risk today is also apparent in 10-year sovereign debt yield declines of 4 basis points in the United States, 3 basis points in Germany, and 2 bps in Great Britain.

The prices of WTI oil and gold fell by 1.0% and 1.3% so far today.

A quintet of central banks that held monetary policy reviews left their main interest rates unchanged:

The record low Filipino overnight reverse repo rate at Bangko Sentral ng Pilipinas stays at 2.25%, having been slashed by 25 basis points in February and 50 bps each in March, April, and June. A released statement observes that GDP contracted sharply in the first half of 2020 but now shows some early signs of recover amid continuing uncertainty. The inflation environment is “benign,” and inflation expectations are contained. For now, the interest rate level was deemed appropriate.

Officials at the Central Bank of Sri Lanka kept the 4.5% Deposit Facility Rate and 5.5% Lending Facility Rate unchanged. Five reductions totaling 250 bps had been authorized earlier this year, but market rates do not yet reflect all of that easing. Covid-19 has spread rapidly, and no demand-driven inflationary pressure is foreseen.

Turkey’s one-week repo rate was left unchanged at 8.25%, having been slashed by 375 basis points in five increments earlier this year, most recently in May. A statement from the Central Bank of Turkey’s Monetary Policy Committee asserts that recovery started in May but warns that uncertainties largely related to the pandemic remain significant. A cautious approach to monetary easing is imperative to sustain disinflation.

At a fourth consecutive monthly review, no changes were made by officials at The People’s Bank of China in the 1-year Loan Prime Rate of 3.85% or the 5-year Loan Prime Rate of 4.65%. These had earlier this year been cut in February and April by a total of 30 bps in the case of the 1-year LPR and 15 bps in the 5-year rate.

The Bank of Norway’s policy interest rate was unanimously voted to stay at zero percent. In a released statement, officials indicate they do not expect to change that rate level during the next couple of year. The coronavirus induced a deep economic downturn. Unemployment remains high, and the new Covid case trend picked up recently.

In spite of monthly rebounds in Euroland construction output of 29.4% in May and 4.0% in June, such remained 5.9% lower in June than a year earlier. That compares with a 6.8% on-year advance back in January.

Swiss industrial production tumbled 8.3% on quarter and 8.6% on year during 2Q. That was the first year-on-year decline of any sort in 14 quarters. The Swiss trade surplus of CHF 2.581 billion in July was similar to its size in the prior two months, but the year-to-July combined surplus of CHF 19.9 billion exceeded the surplus in January-July 2019 by 36%.

German producer prices ticked up 0.2% in July but were 1.7% lower than their year-earlier level. The energy component went up 1.1% on month but fell 5.8% on year.

Hong Kong CPI inflation in July (-2.3%) was negative for the first time in 41 months.

Taiwan experienced a $39.88 billion first-half current account surplus, $5.4 billion wider than a year earlier.

Greece’s July current account of EUR 1.42 billion was the ninth straight deficit in a row and the largest shortfall in that streak.

Swedish unemployment fell to a 3-month low of 8.9% in July but remained 2 percentage points higher than in July 2019.

Polish industrial output was up 1.1% year-on-year in July, but the 7-month total was still 5.2% lower than a year earlier.

Still to come: U.S. index of leading economic indicators.

Copyright 2020, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

 

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