Risk Trade Turned Off

September 30, 2011

New concerns have arisen about Greece and the EFSF enlargement scheme.  Some believe Greece has only enough cash for the first half of October, and German officials continue to threaten no additional financial support without the imposition of more fiscal austerity in Greece. 

Germany’s Bundestag, the lower parliamentary body, approved greater EFSF powers by a 523-85 vote yesterday, and now the bill goes to the upper house.

The credit agencies, Fitch and S&P, downgraded New Zealand’s rating by one notch.

The volume of German retail sales plunged 2.9% in August, six times more than expected and the largest monthly decline since May 2007.  Sales had risen 4.0% in June and 0.3% in July, however, so sales in July-August were 0.8% greater than the 2Q average level. 

CPI inflation in the euro area spiked unexpectedly to 3.0% in September instead of holding steady at 2.5% as analysts were expecting.  3.0% represents the highest inflation rate in 35 months and exceeds the target ceiling by over a percentage point.  This release has dashed the chance of an ECB  rate cut next week.

Euroland’s unemployment rate nonetheless stayed at an ugly 10.0% for a fourth straight month in August and is only two-tenths less than a year earlier.

Stocks are plunging anew in Europe.  The German Dax has fallen 3.0% so far, and the Paris Cac and British Ftse are down by 2.1% and 1.7%.  U.S. futures indicate a likely contagion effect in U.S. stocks.  In Asia, equities dropped 2.3% in Hong Kong, 1.5% in India, 1.2% in Singapore and 0.3% in China.  Stocks closed unchanged in Australia and Japan.

A new aversion to risk is apparent in a stronger dollar, gold price and lower sovereign bond yields.

  • The dollar has risen 1.0% against the loonie, 0.9% versus the kiwi, 0.7% relative to the euro and Australian dollar, 0.5% against the Swissie, 0.2% versus sterling and even 0.1% against the yen.  The yuan is up 0.2% against the dollar and shows a quarterly gain of 1.2% (5.0% annualized) for the whole third quarter.
  • Gold prices rose 0.9% to $1632.20 per ounce.  Oil edged 0.1% lower to $82.03 per barrel.
  • Ten-year German bund and British gilt yields fell by ten and seven basis points, and the comparable Treasury yield future is at 1.94%.  The 10-year JGB firmed three basis points.

Japanese labor, CPI, housing, industrial production and personal spending statistics were released.  So was the PMI-manufacturing index and auto production.

  • The jobless rate fell by an unusually large 0.4 percentage points to 4.3%.  Employment, however, was 0.5% lower than a year before in August.  The job offers ratio continued to creep higher, reaching 0.66 after 0.64 in July and 0.63 in June.
  • Consumer prices in seasonally adjusted terms fell 0.3% in August, reversing July’s increase and were up 0.2% in on-year terms.  Core inflation was also at 0.2%, but the core-core rate, which excludes energy as well as seasonal food, stayed at negative 0.5%.  In Tokyo, where September price data were released, the core and core-core CPI rates of minus 0.1% and minus 0.4% were slightly higher than August results.
  • On-year growth in housing starts of 14.0% and construction orders of 9.3% for August were each better than forecast.
  • A 0.8% increase in industrial production in August was only half as much as expected and resulted in an on-year rise of 0.6%.  Officials nonetheless proclaimed that output “has almost recovered from the Great East Japan Earthquake.”  Early indications point to a 2.5% drop in output in September followed by a 3.8% rebound in October.  Average production in July-August was 5.4% greater than the 2Q level.
  • Real household spending slid 0.1% on month in August and was 4.1% lower than a year earlier.  Real disposable incomes posted a 1.9% on-year drop.
  • The purchasing managers index for manufacturing fell below 50 in September to 49.3 from 51.9 in August and 52.1 in July.  This was the first sub-50 reading, which implies a contraction of activity, since April.
  • A 1.8% on-year increase of auto production was the first increase in eleven months.

China’s manufacturing PMI index was revised to 49.9 from a preliminary estimate for September of 49.4.  Such had been at 49.9 in August as well and 49.3 in July.  Both foreign and domestic demand continue to be lackluster.  The PMI mean for the third quarter was the lowest in ten quarters.

Australian private-sector credit posted on-year growth of 3.0% in August, a 3-month high.  M3 rose 7.8% in the year to August.  In New Zealand, M3 in August was 5.5% greater than a year earlier, and business sentiment sagged to 30.3 in September from a reading of 34.4 in August.  New Zealand building permits were 23% greater in August than a year before.

British consumer confidence returned to minus 30 in September from negative 31 in August.  This was the first improvement, however slight, since minus 21 in  May.

French domestic producer price inflation of 6.3% in July was higher than forecast.  Overall PPI inflation was at 5.4%. Italian PPI inflation printed at 4.5% in August, while the CPI showed a twelve-month advance of 3.1%.  Real consumer spending in France stagnated between June and August and was merely 0.3% higher than a year before in August.  Dutch PPI inflation eased back into single digits of 9.7% in August from 10.2% in July.  Italian unemployment edged down a tenth to 7.9% in August from 8.0% in both July and 2Q as a whole.

Revised Danish second-quarter GDP data put economic growth at 1.0% from 1Q and 1.8% from the second quarter of 2010. Portuguese industrial output was 0.5% lower than a year earlier in August.  The Swiss index of leading economic indicators fell by 0.4 to 1.21 in September.  Analysts had projected less deterioration in that figure. 

Business sentiment in Thailand improved a full point to a reading of 52.2.  On-year M3 growth in Hong Kong slowed to 6.9% in August.  Turkey’s trade deficit narrowed 8.7% on month to $8.2 billion in August.

Scheduled U.S. data releases today feature the Chicago and Milwaukee regional PMI reports, the final U. Michigan estimate of September consumer sentiment, and personal income and spending. Canada reports July GDP.  Bullard of the Fed and German Chancellor Merkel have speaking engagements.

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

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