New Developments Abroad: Awaiting an ECB Rate Hike and U.S. Employment Report

July 3, 2008

The dollar rose 0.5% against the yen, 0.4% against sterling and 0.3% against the Canadian and Australian dollars, but it is unchanged against the euro and off 0.1% against the Swiss franc.

Asian stocks fell.  The Nikkei slid only 0.2% but extended its losing streak to 11 straight sessions.  Hang Seng -2.1%.  Indonesia -3.4%. India -4.6%. S. Korea 01.1%.

In Europe, the Dax is 0.8% lower.  The Paris Cac is off 0.7%, and the Ftse has declined 0.3%

Oil hit a new high of $145.43/barrel and is 1.0% higher on balance.  U.S. Treasury Secretary Paulson blamed elevated oil costs on demand outstripping supply, not dollar depreciation.  He expects elevated oil prices to persist, as well as the additional problems of a housing correction and capital market strains.

Gold eased 0.5% but remains above $940/ounce.

Japan’s 10-year JGB auction produced the biggest bid:cover ration (3.09) in a year.  The yield on the 10-year is flat at 1.66%.  Bund yields are slightly higher.

The ECB is expected to raise rates by 25 basis points at 11:45 GMT today.  A press conference begins at 12:30 GMT.

Sweden’s Riksbank lifted its key rate as expected to 4.5% from 4.25% but took the additional unexpected step of raising its projected interest rate path, signaling two additional tightening moves this year.

Indonesia’s central bank raised its bank rate by another 25 basis points to 8.75%.  This third rise of 2008 had been expected, with CPI inflation at a 21-month high of 11.0%.

Iceland’s central bank kept its bank rate at a record high of 15.5% as expected.

Final Ezone PMI’s for the service sector were reported.  The bloc’s flash (i.e., preliminary) reading of 49.5 was revised down to 49.1, which compares with 50.6 in May and 58.3 in June 2007. It’s the lowest reading since June 2003.  The major shock involved Spain’s 35.2 score, down from 43.3 in May and 56.3 a year earlier.  Such is the lowest PMI reading for any Euroland member ever and leaves little doubt that Spain’s economy is in a pretty pronounced recession.  Germany’s PMI was also revised lower to 52.1 from a flash indication of 53.3.  Italy’s 48.5 score was better than forecast and up from 48.1 in May.  Likewise, France posted a 50.1 reading, which exceeded expectations of 49.2.  For PMI readings, like other diffusion indices, readings above 50 connotes expansion; below 50 implies contraction.  Euroland’s composite PMI, comprising both services and manufacturing, slid to 49.3 in June from 51.1 in May.  U.S. PMI-service scores will be reported at 14:00 GMT for comparison purposes.

Retail sales in Euroland advanced 1.2% m/m in May, breaking a string of three straight drops totaling -1.7%.  Sales were only 0.2% higher than a year earlier, and their average level in April-May was 0.8% below the 1Q08 level.  The trend is down as oil prices climb.

Australia’s trade in April was revised to a tiny surplus, the first black-ink entry since 2002, but such returned to a deficit of A$ 965 million in May.

Japanese stock and bond transactions generated a Y 1.5 trillion net inflow last week.

The U.K. PMI-services index fell much more than anticipated in June to 47.1 from 49.8 in May.  It is the worst reading since October 2001.  But the input prices component climbed from 67.7 to 71.1, highest ever for this data series dating back to July 1996.  Britain has a severe case of stagflation.  British construction orders fell 4% y/y in May.

Consumer confidence in Spain slumped to a record low of 51.7 in June from 56.4 in May.

Russia’s PMI-services index firmed to 59.1 in June from 58.7 in May.  Dutch 1Q08 GDP growth was revised up to 0.4% from 4Q07 and 3.3% y/y.

The United States Labor Department is expected to report another drop in jobs at 12:30 GMT today.  This release comes a day earlier than the typical first Friday of the month because of tomorrow’s Independence Day Holiday.  Happy 232nd birthday, America!


6 Responses to “New Developments Abroad: Awaiting an ECB Rate Hike and U.S. Employment Report”

  1. Susan says:

    If I interpret correctly, this coverage will be provided on a daily basis – correct?

  2. larrygreenberg says:

    That’s the plan.-Blogger

  3. Jimbo says:

    You briefly mentioned the UK’s housing in several articles. Is there a possibility of a similar mortgage scenario in the UK and subsequent weakening of the Pound?

  4. larrygreenberg says:

    Sure. I assume by “similar,” you mean similar to what has happened in the United States. British housing prices at peak were actually more overvalued than U.S. housing prices at their peak, and Britain’s housing market is declining for different reasons than the U.S. housing market. But weakness in this sector of the economy is spreading to other sectors, threatening a recession and putting downward pressure on the pound.

  5. Daniel Hewitt says:

    Will the BoK wait until inflatoin actually falls to lower rates, or do you think they might react to further economic weakness? Does the UK ever do what the Americans do to combat growth declines–e.g., tax rebates?

  6. larrygreenberg says:

    Good questions. Britain’s last recession was in the early 1990’s, so it’s been a long time since fiscal stimulus would have been contemplated. I do not recall a stimulative tax rebate scheme outside of the formal spring budget process, and prospects for one now look poor. Public finances eroded in recent years, and it would not be possible to implement meaningful tax rebates without violating the Treasury’s self-imposed fiscal rules. I do not expect a near-term rate cut in Korea before inflation has crested. The won is already under considerable selling pressure. The reported $2 billion of intervention support today sends a powerful signal that fighting inflation is the top priority. Currency depreciation feeds that problem.