Calmer Conditions but Situation Still Fragile

July 13, 2011

The market’s angina of Tuesday has faded somewhat.  The strength of Chinese data including second-quarter GDP surpassed expectations, and Italy’s lawmakers appear poised to approve austerity by the end of this week.  More hope exists that the U.S. debt ceiling will be lifted before August 2.  The Bank of Japan’s monthly assessment accentuated positive developments as that economy recovers from its March earthquake.

The respite could fleeting.  The fat lady hasn’t sung in either Europe’s debt crisis or the U.S. fiscal tug of war.  Economies like Italy are not going to get more competitive in the euro strait-jacket, and Fed Chairman Bernanke delivers his semi-annual Humphrey-Hawkins testimony before the House Financial Services Committee at 14:00 GMT today.  Moody’s downgraded Irish debt to junk status. BOJ Governor Shirakawa is warning of possible short-term damage caused by the strong yen.  Strong Chinese growth usually means more fiscal and monetary restraint, and markets tend to react adversely to that.  Overnight British labor and Ezone industrial production data reflected slower activity.  Japan continues to experience significant after-shocks from the Sendai quake.

The dollar settled back 0.7% against the euro, which climbed back above the $1.4000 threshold.  The greenback also dropped 0.9% against the kiwi, 0.6% relative to the Aussie dollar, 0.4% against the Canadian dollar, an 0.1% versus the yuan and sterling.  Typical of somewhat less risk aversion, the dollar recovered 0.3% against the yen and 0.1% relative to the Swissy.

Gold is probing record highs at $1572.60 per ounce, 6.1% above its close on July 1. Oil is not far from $100 per barrel, although off 0.1% at $97.34.

Share prices rose 1.6% in China, 1.4% in Thailand, 1.1% in Indonesia, 1.2% in the Philippines and Hong Kong, 1.0% in India and 0.4% in Japan and Australia.  The British Ftse also is 0.4% higher, while the German Dax and Paris Cac have traded up 0.7% and 0.3%.

Ten-year German bund yields firmed two basis points, while their British counterpart slid by three bps.  Japanese JGBs are steady by at a lowly 1.11%.

Chinese real GDP expanded 2.2% on quarter and 9.5% on year in 2Q11.  On-year GDP growth in the first half of 2011 of 9.6% was closer to 10% than 9%, a result few anticipated.  Retail sales advanced 17.7% on year in June, up from 16.9% in May and the strongest pace since January.  Analysts had forecast 17.0%.  Industrial production growth of 15.1% also beat expectations for June of 13.9% and showed acceleration from 13.3% in May and 13.4% in April.  Fixed asset investment during the first half of 2011 was 25.6% greater than a year earlier, which juxtaposed against a 25.0% on-year increase in 1Q implies quickening investment between 1Q and 2Q.

Japanese industrial production for May was bumped up to a rise of 6.2% from 5.7% reported initially, but April-May combined still shows a drop of 6.2% compared to the first-quarter level.  Output in March had plunged 15.5% in the immediate aftermath of Japan’s earthquake.  The inventory ratio fell 3.3% on month in May but was 12.2% greater than a year earlier.  Capacity use recovered 12.8% in the latest month, but capacity edged only 0.2% higher.

The Bank of Japan’s July monthly assessment rehashed what had been said in the central bank’s post-meeting statement released yesterday:  the economy is and will continue to pick up with an easing of supply-side constraints caused by the earthquake disaster.  While conceding that a strong yen could produce desirable long-term benefits, BOJ Governor Shirakawa express concern about the yen, which even today is trading more strongly than 80 per dollar, as well as other external problems like the European debt crisis and slower U.S. growth.

The Bank of Thailand as expected lifted its key interest rate for an eighth time.  Such is now at 3.25% compared to 1.25% prior to mid-2010.

South Korean M1 and M2 money growth slowed in May, the former to 7.4% from 9.6% on year in April and the latter to an 85-month low of 3.7% from 3.9%.  South Korea unemployment held steady at 3.3% in June.

Euro area industrial production firmed just 0.1% in May following similarly weak gains of 0.1% in March and 0.2%.  This marks a pronounced slowdown following annualized advances of 4.2% in the first quarter and 7.5% between 3Q10 and 4Q10.  The 12-month rate of increase has fallen from 9.1% in December to 4.0% in May.

The claimant count of British unemployment rose 24.5K last month on top of gains of 16.9K in April and 22.9K in May.  The increase between December 2010 and March 2011 had been only 1.6K.  The claimant jobless rate is now 4.7% versus 4.5% prior to April, but the standardized ILO unemployment rate of 7.7% in the three months to May was a tenth less than 7.9% in the prior three months to February.  British wages remain subdued with on-year rises of 2.3% including bonus pay and 2.1% excluding such during the three months to May.

The Swiss producer/import price index fell by a greater-than-forecast 0.5% in June and by 0.4% from a year earlier.  Domestic producer prices were 0.8% lower than in June 2010.

German wholesale prices fell 0.6% in June after holding steady in May.  On-year WPI inflation of 8.5% was down from 8.9% in May, 9.2% in April and a high for the move of 10.9% in March.  Oil product prices were 14.3% above a year earlier, down from a 16.2% on-year increase in April.

Spain’s CPI released confirmed the preliminary indications of a monthly dip of 0.1% and a 3.2% on-year pace in June.  Consumer prices had risen 3.5% in the year to May.  Core inflation is now down to 1.7%.  The volume of Finnish retail sales rose 5.3% in the year to May.

U.S. mortgage applications fell in the first week of July by 5.1%.  It was the fourth consecutive drop.  The 30-year fixed mortgage rate also moved lower, falling to 4.55% from 4.69%.  U.S. import prices and the June budget results are scheduled today, but the lead even will be Bernanke’s congressional testimony.  The presidents of the Boston Fed (Rosengren) and Dallas Fed (Fisher), who are respectively dovish and hawkish, also speak publicly today but will be overshadowed by what the chairman says.  Bernanke’s testimony begins at 10:00 local time. 

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

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