New Overnight Developments Abroad: China Interest Rates and Reserve Requirements Cut Again

December 22, 2008

Stocks are lower. In the Pacific Rim, stocks fell by 3.3% in Hong Kong, 2.9% in Thailand, 2.8% in Singapore, 3.3% in the Philippines and 1.6% in Australia. A 1.6% rise of Japan’s Nikkei-225 index was an exception to the global downtrend. In Europe, the Paris Cac, German Dax, and British Ftse are trading down by 1.7%, 1.4% and 1.0%.

Sterling fell another 1.0% against the dollar, as Bank of England policymakers (Gieve and Besley) underscored the insufficiency of monetary policy for reviving U.K. growth.  The dollar also rose 0.7% against the yen but shows losses of 0.4% against the euro and Swissy and of 0.3% against the Canadian and Australian dollars. The Russian ruble hit its lowest level against the dollar since January 2006, as officials engineered their sixth mini-devaluation of December. Ukraine officials intervened.

The yield on ten-year JGB’s touched 1.20%, lowest since July 2005, and is off 1.5 bps on balance at 1.225%. Gilt and bund yields are marginally lower, too.

A severe U.S. cold snap following widespread snowstorms has crippled any residual last-minute holiday shopping in much of the United States. Oil firmed 0.6% to $42.60 per barrel, and gold is 1.1% firmer at $846.20 per ounce.

The People’s Bank of China reduced its key interest rates by another 27 basis points to 5.31% for loans and 2.25% for deposits. Such follows earlier cuts on September 15, October 8, October 29, and November 26th. Reserve requirements were lower half of percentage point further as well to 15.5% for the largest banks and 13.5% for all others.

Earlier, China reported its first drop in international reserves since December 2003 and only the second monthly decline since 1999. In light of a strong trade surplus in October of $35.2 bn, the news suggests the beginning of an alarming outflow of capital. Reserves in October fell at least $16 billion. Meanwhile, Chinese corporate goods prices swung to a 12-month dip of 0.4% in November from +4.0% in October and a peak of +10.3% in the year to last April.

Japanese customs exports plummeted 26.7% in value terms and 21.9% in volume in the year to November. Export values fell by 33.8% to the U.S., 30.8% to the EU, and 26.7% to Asia. Japan’s seasonally adjusted trade deficit widened to -Y 357.6 bn from -Y247.9 bn in October, and both exports (-13.9%) and imports (down 11.2%) plunged over 10% last month.

The monthly Tankan proxy index for Japanese business sentiment compiled by Reuters sank to -64 for manufacturers in December from -42 in November and -14 in September. The non-manufacturing index dropped to -26 from -16 in November and -10 in September.

Bank of Japan Governor Shirakawa spoke to business leaders, warning the worst lies ahead. The BOJ monthly assessment was downgraded to “economy is deteriorating” and “conditions are likely to increase in severity.” Japan’s cabinet also downgraded its monthly economic assessment to “worsening” from “weakened further.” The government downgraded characterizations of industrial output, profits, investment, and the employment situation.

Toyota is predicting an operating loss. Germany’s Kiel Institute is now projecting a shocking 2.7% GDP decline in 2009.

French producer prices fell 1.9% on month in November, twice as much as expected. The PPI rose 1.6% from November 2007. There were 11.6% fewer tourists in Spain last month than in November 2006.

German import prices fell 3.4% m/m and 1.3% y/y in November, each lower than expected. Even non-oil import prices sank 1.2% from October and rose by 3.2% y/y, down from a 4.1% on-year increase in October. German consumer sentiment held steady at 2.1 in December after ticking up from 1.9 in October. Such has been buoyed by lower inflation.

Icelandic consumer price inflation accelerated to 18.1% in December from 17.1% in November, reflecting currency depreciation.

European industrial orders plunged 4.7% m/m in October and by 15.1% in the year to October. Orders were 8.7% below the 3Q average level after having dropped 10.1% at an annualized pace in the third quarter.

Hong Kong consumer prices rose 3.1% in the year to November, more than expected.

New Zealand’s current account deficit widened 9.6% in the year to 3Q, about as much as expected, and equaled 8.6% of GDP.

Australian motor vehicle sales fell 5.2% in November, the fifth drop in a row.


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