New Overnight Developments Abroad: $586 Bn Chinese Fiscal Stimulus Sparks Equity Rally

November 10, 2008

Beijing announced a $586 billion fiscal package, consisting mostly of new spending but also lower taxes. The monetary stance was shifted to “moderately easy” from tight, heralding additional interest rate cuts. Chinese producer price inflation fell sharply to 6.6% in October from 9.1% in September and a peak of 10.1% in August. A government source leaked news that industrial output, due later this week, will post a gain of around 8% for the year to October, the first sub-10% outcome since late 2001. China’s policy response is huge and sparked a rally in world equities and commodity prices and a drop in the yen and dollar.

The Nikkei climbed 5.8% and closed back above 9000. China’s CSI-300 advanced 7.4%. Stocks also rose by 5.7% in India, 3.8% in Germany, 3.7% in France, 3.5% in Hong Kong, Switzerland and Italy, 3.4% in Britain, and 1.4% in Australia.

Sovereign bond yields are higher. The 10-year JGB increased 2.5 basis points to 1.535%.

Oil prices rose 5.2% to $64.22/barrel. Gold is 2.3% higher at $751.20/ounce. Copper leaped about 8%.

The yen fell 1.1% against the dollar and more against other currencies. The greenback shows losses of 2.9% against the  Australian dollar, 2.3% against the kiwi, 1.6% relative to the Canadian dollar, 1.4% against the euro, 1.0% against sterling, and 0.6% against the Swiss franc.

Taiwan’s central bank cut its discount rate for a fourth time in 2 months, the latest move being to 2.75% from 3.0%.

Although Japanese core domestic machinery orders rebounded by more than expected in September (5.5%), such plunged 10.4% in 3Q08, most since the second quarter of 1998. Officials project a recovery of just 1.4% in 4Q08, which is likely to prove too optimistic.

Industrial production in September fell by 2.1% in Italy, most since 12/98, and by 0.5% in France, and such recorded on-year declines of 5.7% and 2.1%, respectively. On Friday, Germany reported a 3.6% decline in industrial output. Euroland production will be reported on Wednesday.

The Reserve Bank of Australia released its quarterly monetary policy report and revised down projected growth to 1.75% in 2009 and 2.5% in 2010, sharply below forecasts last week of 2.5% and 2.75%. The RBA now expects core CPI inflation to drop from 4.7% presently to 3.5% by end-2009, 3.0% at end-2010, and to below 3% in 2011. The report points to further big declines in the 5.25% cash rate after 200 bps of reduction since September.

Australian housing finance fell 2.7% in September, the 8th consecutive month of decline.

British producer output prices fell 1.0% m/m in October, the biggest monthly decline in at least 22 years, cutting its 12-month rate of rise to 6.8% from 8.5%. Core PPI-O slid to 4.9% from 5.5%. Producer input prices plunged 5.6% between September and October and to 13.8% y/y from 24.0% y/y. Inflation in the U.K. is receding much faster than anticipated. More large rate cuts lie ahead.

Investor sentiment in Euroland worsened to a reading of -36.4 in November from -27.8 in October.

South Korean producer prices slid 0.3% for a second straight month in October, cutting the 12-month advance to 10.7% from 12.3% in August.

After meeting in Sau Paulo, G-20 officials released a statement of agreement urging more government spending and deeper interest rate reductions.

Greek consumer price inflation fell to 3.9% in October from 4.6% in September. Norwegian producer prices fell 1.3% m/m in October.  Like other price news today, these drop exceeded expectations.

Turkish industrial output fell 5.5% y/y in September, the worst result since December 2001.


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