China Gets a Third Interest Rate Hike

February 8, 2011

After an uneventful Monday, markets finally have some important news:

  • The Peoples Bank of China announced hikes of 25 basis points each in the one-year lending rate to 6.06% and in the one-year deposit rate to 3.0%.  Earlier increases of similar size were announced last October 19 and December 25.  Today’s decision was made as the one-week holiday for the Lunar New Year draws to a close and was implemented in the face of excessive bank lending and inflation.  Also, fourth-quarter on-year GDP growth had unexpectedly accelerated to 9.8% from 9.6% in 3Q.  The yuan traded down 0.1% in response to the news.
  • Britain’s Conservative-led government hiked the tax levy on banks, which now will be assessed 0.1% on short-term liabilities and 0.05% on long-term ones.  The move, which is expected to raise GBP 800 billion for the government, was seen as a depressant on sterling.
  • German industrial output, which had been expected to firm 0.2%, instead sank 1.5% in December on top of a 0.6% decline in November.  Harsh weather caused construction to plunge 24.1%, while manufacturing slid 0.1% in spite of a 3.3% increase in capital goods.  Total output still rose 1.9% in the fourth quarter but ended the period 1.2% below the fourth-quarter average.  Industrial production was 10.0% greater than in December 2009.

The dollar and stocks were hit by the tightening of Chinese monetary policy.  The dollar lost 0.6% against the euro, 0.8% versus the kiwi, 0.3% relative to the yen, 0.2% against the Swiss franc and Canadian dollar but just 0.1% versus sterling.  The Aussie dollar held steady against its U.S. counterpart.

Stocks fell 1.5% in India, 0.8% in Indonesia, 0.7% in South Korea, 0.4% in Taiwan and 0.3% in Hong Kong.  The Nikkei, however, advanced 0.4% to a nine-month high.  In Europe, stocks show minor changes of minus 0.2% in Britain, minus 0.1% in France and +0.1% in Germany.

Copper slumped 1.0%, and oil fell for a third straight session, dropping 1.4% to $86.27 per barrel.  Traffic through the Suez Canal remains undisturbed.  Gold firmed 0.5% to $1354.50 per ounce.

The ten-year JGB held at its recent high of 1.30%.  Japan’s Finance Minister Yosano indicated that level does not warrant counter-active measures by the government.  Ten-year German bunds and British gilts slid one basis point apiece.

Several Japanese statistics were released overnight.

  • The JPY 1.195 trillion current account surplus in December was bigger than November’s JPY 926 billion and JPY 916 billion in December 2009.  The 2010 surplus of JPY 17.08 trillion was 28.5% wider than the surplus in 2009.  Merchandise exports grew 25.7% in 2010, while imports went up 19.4%.  There was a basic balance deficit of JPY 4.31 trillion in December.  The basis balance includes the current account and long-term capital flows.
  • According to customs trade figures, a JPY 764 billion deficit had accrued over the first twenty days of January versus a deficit of JPY 670 billion a year earlier.  January is the weakest month for trade because Japan’s long new year holiday depresses exports more than imports.
  • Stock and bond transactions generated a tiny JPY 72 billion outflow in January.
  • The economy watchers index, a barometer of retail sector activity, dropped to 44.3 in January from 45.1 in December.  It had been as low as 40.2 in October, and the forward-looking component improved to 47.2 from 43.9.
  • On-year 2.3% M2 money in January was the same as December’s result.  Broad liquidity was 0.1% lower than a year earlier.  Bank lending recorded a 12-month drop of 1.8% including trusts and 1.9% excluding them.
  • Bankruptcies were 1.5% smaller in January than a year earlier.

Business conditions in Australia improved to a reading of plus 4 in January from minus 3 in December, whereas business confidence deteriorated to minus six from plus six.  New Zealand house prices posted a greater 1.5% on-year drop in January.

Britain’s Royal Institute of Chartered Surveyors released its January house price survey.  The house price reading of negative 31% was the smallest decline in six months.  Same-store retail sales according to the British Retail Consortium posted a 2.3% on-year advance in January, the best reading in ten months.  Total sales were 4.2% greater than a year earlier.

Sri Lanka’s central bank left its repo rate steady at 7.0% as analysts were expecting.

Dutch industrial production rose 1.1% in December and recorded a 5.0% on-year increase.  Swiss seasonally adjusted unemployment remained steady and low at 3.5% last month.  The French trade deficit widened 23% to EUR 5.05 billion in December.  The monthly average of EUR 4.29 billion in 2010 was 16.3% greater than in 2009. Denmark’s trade surplus was 14.4% smaller in December than November.  The current account surplus contracted 29% that month.  Iceland’s trade surplus narrowed 27% in January, while Portugal’s trade deficit last quarter of EUR 5.36 billion was 8.5% wider than in 3Q10.

South Africa’s jobless rate fell to a still troublesome 24% last quarter from 25% in 3Q.  Turkish industrial production grew 5.7% on month and 16.9% on year in December.  The Czech jobless rate edged up a tenth to 9.7% in January.  Romanian industrial production on a working day adjusted basis rose 6.5% in December and 4.1% in 2010.

Scheduled U.S. data releases today include the NFIB small business sentiment index, the IBD/TIPP optimism index, the Labor Department’s JOLTS index, and weekly chain store sales.  Canada releases housing starts.

Copyright Larry Greenberg 2011.  All rights reserved.  No secondary distribution without express permission.



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