Focus on Policy Support

September 16, 2011

Stocks in the Pacific Rim advanced by 3.7% in South Korea, 2.6% in Taiwan, 2.3% in Japan, 1.9% in Australia, 1.6% in Indonesia, 1.4% in Hong Kong, 0.8% in Singapore but just 0.3% in India and 0.2% in China where containing inflation remains the top priority.  In Europe, the German Dax so far is up 1.0%, the British  Ftse has improved 0.7%, but the Paris Cac is only steady.

Yesterday’s coordinated announcement by the Fed, Bank of England, ECB, Swiss National Bank and Bank of Japan to provide dollar liquidity via 3-month repo operations covering the period beyond yearend continues to support market sentiment regarding the health of banks.

As EU finance ministers meet today in Poland with U.S. Treasury Secretary Geithner in attendance, there is talk of a proposal to create a facility modeled after the U.S. TALF involving the EFSF and the ECB that would substitute suspect EU sovereign debt with asset-backed securities.

The yields on ten-year British gilts and Japanese JGBs firmed a basis point each, while German bunds held steady.

The dollar climbed 0.5% against the euro, 0.4% versus the Swissie and 0.1% against the loonie but fell by 0.7% against the kiwi, 0.2% relative to the Australian dollar, and 0.1% against the yuan and sterling.

Oil slid 0.4% to $89.01 per barrel, and gold edged down another 0.1% to $1779.20 per ounce. Gold had traded briefly above $1900 on September 5.

Late Thursday came word that the Central Bank of Chile left its benchmark interest rate at 5.25%.  Policy has paused there since June following a dozen rate hikes totaling 475 bps dating back to June 2010, as officials watch global developments closely.

At the Reserve Bank of India, however, policymakers today decided on a twelfth rate increase, lifting the repo rate and reverse repo by 25 basis points each to 8.25% and 7.25%.  Indian inflation accelerated in August, and monetary officials fear that a premature end to tightening might boost inflation expectations.

The central bank of Sri Lanka kept its repo rate steady at 7.0%, which was the expected outcome of its latest policy meeting.

Japan’s new prime minister and former finance minister, Noda, again protested aloud about yen strength hurting exports.

Another German state election will be held this weekend, this time in Berlin.

Consumer confidence in New Zealand fell to 112.6 in September from a reading of 113.3 in August.  Turkish consumer sentiment worsened even more sharply, dropping to 91.74 in August from 94.83 in July.

Euroland posted its largest monthly current account deficit so far in 2011.  In seasonally adjusted terms, the shortfall widened in July to EUR 12.9 billion from EUR 7.1 billion in June and EUR 5.6 billion in May.  Transfer payments accounted for EUR 9.2 billion of July’s deficit, and merchandise trade and net investment income were also in the red.  The unadjusted current account gap in the 12 months to July amounted to EUR 71.8 billion, up from a deficit of EUR 23.2 billion a year earlier.  But portfolio investment inflows in the latest 12 months jumped to EUR 343.5 billion from EUR 199.3 billion a year before.

Euroland’s seasonally adjusted trade deficit was EUR 2.5 billion in both June and July.  Exports and imports each recovered after steep monthly drops in June.

Prospects for a reversal of the ECB’s rate hikes this year were dealt a blow from hourly labor cost data for the euro area.   In the year between 2Q10 and 2Q11, total labor costs rose 3.6%, accelerating from on-year increases of 2.7% in the first quarter, 1.7% in 4Q10 and 1.5% in 2Q10.

Italy’s trade deficit widened to EUR 2.2 billion in July from EUR 2.0 billion in June.

Singapore’s trade surplus, in contrast, narrowed 49% on month to S$ 2.83 billion in August.

Scheduled North American data today include the U.S. TIC data of international monthly capital flows, the U. Michigan early-September consumer sentiment index, and Canadian securities transactions with other countries.

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

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