Investors Breath Sigh of Relief

September 13, 2010

Stocks, sovereign bond yields, and commodities are higher, while the dollar is lower.  The People’s Bank of China did not raise interest rates, and the weekend’s agreement on Basel III produced decisions that did not surprise investors and seem manageable.

The dollar has lost 0.7% against the euro and Australian dollar, 0.5% versus the Canadian dollar and Swiss franc, 0.4% against the kiwi, 0.3% relative to sterling, and 0.2% against the yen.

Ten-year German bund and British gilt yields firmed by four and three basis points.  The 10-year JGB yield is steady at 1.16%.

Oil advanced 1.1% to $77.27 per barrel.  Gold is steady at $1246.80 per ounce.

China released many economic indicators on Saturday.  Chinese on-year growth in industrial production and retail sales accelerated to 13.9% and 18.4% in August from 13.4% and 17.9% in July.  Both gains surpassed analyst expectations and suggest that China’s economy is not going to slow excessively.  Fixed asset investment in January-August was 24.8% greater than a year earlier, which likewise was a touch better than assumed.  CPI inflation only accelerated two-tenths to 3.5% and was in line with forecasts, while PPI inflation eased more than expected to 4.3% in August from 4.8% in July and a recent peak of 7.1% in May.  More disturbingly, M2 growth of 19.2% after 17.6% in the year to July rose for the first time in nine months, and new lending of 545.2 billion exceeded expectations of 500 billion yuan, suggesting such will also surpass the central bank’s target. 

China’s big development was what did not happen.  No hike in central bank rates occurred.  The data released on Saturday had been scheduled originally for Tuesday, when the release time was inexplicably moved forward to the weekend, a rate hike had seemed possible.

The yuan touched a 16.5 year high against the dollar of 6.7568 overnight and gained 0.1% on balance.  The recent rally occurred ahead of a debate on Chinese currency policy in the U.S. House Committee on Ways and Means later this week.

New capital adequacy ratios for world banks, also known as Basel III, were decided over the weekend and contain no real surprises.  Regulations for what constitutes acceptable bank reserves have been tightened, and the ratios of common stock to assets will almost double, but the eight-year period of compliance removes an element of urgency.  Markets rallied in response.

The Czech current account deficit widened 119% between July and August to CZK 32.53 billion.  All components of the shortfall, but especially net investment payments, moved adversely.  The French current account deficit of EUR 2.2 billion in July was EUR 0.5 billion less than that in June.  The Dutch trade surplus widened 19% in July.

The Swiss index of producer and import prices edged up 0.1% on month and recorded an unchanged 0.5% on-year increase.  These gains were marginally greater than expected.  Sweden’s 4.8% jobless rate last month met expectations.

Food prices in New Zealand dipped by 0.1% on month and 0.2% on year in August, meeting expectations.

The EU Commission projects slower Euroland GDP growth of 0.5% this quarter and 0.3% in 4Q but revised projected growth for 2010 as a whole to 1.7% from a prior estimate of 0.9%.

PPI inflation in Hong Kong accelerated to 5.9% in 2Q10 from 4.0% in the first quarter.

The U.S. August Federal deficit, due later today, will likely be a little larger than July’s.  No other data are scheduled in the U.S. or Canada.

Copyright 2010 Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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