Markets Anticipating Lower Interest Rates

October 6, 2010

Stocks advanced further overnight, bond yields fell, and the dollar remained weak across the board as markets look to more central banks easing as the BOJ did yesterday.

The Nikkei advanced 1.8%, and the yield on 10-year JGBs fell eight basis points to 0.84%, lowest since June 2003.  However, an unacceptably strong yen, which triggered the Bank of Japan’s easing steps, has grinded up another 0.2% against the dollar.

The dollar has also depreciated 0.5% against the Australian dollar, 0.4% versus the kiwi, 0.3% relative to the Canadian dollar, 0.2% against the Swiss franc, and 0.1% versus the euro.  Sterling moved in lock-step with the dollar as investors await the Bank of England and ECB rate decisions Thursday.  New dollar lows for the move were hit at 1.3883 per euro, CHF 0.9641, 0.7537 per kiwi, and 0.9784 per AUD.

Ten-year British gilt and German bund yields fell by five and three basis points.

Gold climbed another 0.5% to $1347.20 per ounce, while oil settled back 0.2% to $82.67 per barrel.

German industrial orders shot up 3.4% in August, four times faster than expected, and July’s drop was revised lower to 1.6% from 2.2% reported initially.  Orders in July-August combined were 2.5% greater than the second-quarter level.  Orders had soared by 6.7% (not annualized) in 1Q and 7.6% in 2Q.  Orders for total, domestic, and foreign capital goods advanced 6.7%, 2.0%, and 9.8% in August.  Total industrial orders were 20.3% greater than a year earlier.

Residential construction prices in Germany were 1.2% higher than a year earlier in August.

British new car registrations posted a 12-month decline of 8.5% in September after a drop of 17.5% in the year to August.  British shop price inflation accelerated to 1.9% in September from 1.7% in August according to data released by the British Retail Consortium.

Real GDP in the euro area expanded 1.0% in 2Q from 1Q (roughly 3.9% annualized) and 1.9% compared to the second quarter of 2009.  These results were unchanged from the previous estimate released September 2nd.  Inventory-rebuilding accounted for 1.6 percentage points of the 1.9% of on-year growth.  Quarter-on-quarter growth of 2.2% in Germany, 1.0% in the Netherlands, 0.9% in Belgium, 0.7% in France and 0.5% in Italy was balanced by smaller gains of 0.3% in Portugal and 0.2% in Spain and negative growth of 1.2% in Ireland and 1.8% in Greece.  Between 2Q09 and 2Q10, real GDP rise 3.7% in Germany, 2.7% in the Netherlands, 2.4% in Belgium, 1.7% in France and 1.3% in Italy while contracting by 0.1% in Spain, 1.8% in Ireland and 3.7% in Greece.

Hungarian industrial production rebounded by a greater-than-expected 2.2% in August and was 14.9% above year-earlier levels.

Calls persist for an agreement at the G-20 level for policy coordination to impose a new configuration of global currency relationships, lest the free-for-all dash for depreciation by everyone spin out of control.  Thus far, Washington and Chinese officials appear to be winning the currency war.  There will be no deal without their participation, and that does not seem very likely to happen.

The Bank of Japan released its monthly economic assessment a day after surprising markets with a rate cut and asset purchase plan.  Officials noted signs of a moderate recover but observed that its pace is slowing down.  Belying the insurance taken out with yesterday’s easing, the assessment maintains that the slower pace of growth should prove temporary, that is not evolve into outright recession, and that the pace of consumer price deflation will gradually subside.  Officials also observe that financial conditions continue to ease.

Today’s main releases in North America will be the ADP estimate of private employment in the United States last month and Canada’s IVEY-PMI index, a composite of both manufacturing and non-manufacturing activity.  The ECB, Bank of England, and central banks in the Philippines and Peru hold interest rate meetings tomorrow.

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

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