Focus Shifts to FOMC Meeting from Los Cabos Summit

June 20, 2012

The G20 summit in Mexico wound down with words of commitment from European delegates to fix their problems and preserve the common currency as well as expressions of support from other world leaders for efforts being taken.  Typically, there was more talk than actual action.  Attention next turns to today’s FOMC meeting and Chairman Bernanke’s press conference.  The consensus is that Operation Twist will not be allowed to end just yet.

In this wait and see mode the dollar is unchanged overnight against the Australian dollar, sterling, yen and loonie.  The greenback has edged 0.1% lower against the Swiss franc and euro and risen by a similar tiny amount versus the kiwi and yuan.

Stocks mostly climbed in the Pacific Rim although drops of 1.0% in New Zealand and 0.2% in China were exceptions.  Equities gained 1.6% in Indonesia, 1.3% in the Philippines, 1.1% in Japan, 0.9% in Taiwan, 0.7% in South Korea, and 0.5% in Hong Kong and Singapore.  In European markets, the German Dax and British Ftse are unchanged.  The Spanish IBEX is 0.7% stronger, while the Paris Cac softened 0.5%.

The 10-year German bund yield rose six basis points.  The British gilt slid a basis point and the Japanese JGB recovered a basis point to 0.83%.

Gold and oil prices fell by 0.5% and 0.3% to $1615.10 per ounce and $83.81 per barrel.

Minutes from the Bank of England’s policy meeting earlier in June revealed a razor-thin 5-4 vote rejecting more stimulus.  Notably, Governor King sided with the minority, voting to increase asset buying by GBP 50 billion to a limit GBP 375 billion.  Miles and Weale cast similar votes, while Fisher sought GBP 25 billion of additional asset purchases.  It was widely agreed, even among the others preferring further wait and see, that more stimulus would eventually prove needed.  The near-term path of inflation now looks lower than believed when the Monetary Policy Committee met in May because of falling commodity prices and tame wage costs.  Officials endorsed a couple of actions to promote bank lending and rejected calls for a cut in the 0.5% Bank Rate (claiming quantitative stimulus to be just as effective and associated with lesser potential for collateral market damage). 

British labor statistics were released.  The claimant count of unemployment unexpectedly increased, climbing 8.1K in May but holding at 4.9%.  The ILO-basis unemployment rate held steady at 8.2%.  On-year wage growth in February-April accelerated a bit but remained subdued at 1.4% including bonus pay and 1.8% excluding such. 

Japan’s unadjusted customs-basis trade deficit of JPY 907 billion in May surpassed expectations by around 60% and embodied the first monthly deficit vis-a-vis Europe in over 30 years.  The seasonally adjusted deficit was JPY 657 billion in May and averaged JPY 601 billion in March – May.  Exports dipped 0.5% on month but rose 10.0% on year.

Minutes from the Bank of Japan’s May policy meeting when no change was decided unanimously expressed considerable concern about danger posed by Europe’s debt crisis and indicated a readiness to counter any undue drag from that risk factor.  The baseline forecast, however, looks for moderate recovery ahead with near zero inflation.  Governor Shirakawa predicted more support ahead from quantitative monetary easing taken earlier this year.  Japanese legislators have approved the nominations to fill the two empty slots on the Policy Board.  Both are economists by training and generally supportive of a pro-growth stance to conquer deflation. 

Japan’s all-industry index edged up just 0.1% in April, depressed by drops of 0.2% in industrial production and 0.3% in service-sector activity.  The index was 0.1% lower than the 1Q12 average level but 4.1% higher than in April 2011. 

New Zealand’s current account deficit narrowed 52.5% on quarter to NZD 1.3 billion in the first quarter.  Australia’s index of leading economic indicators slumped by 1.4% in April, while the coincident index firmed just 0.2% that month after a 0.4% increase in March.  Australian housing starts plunged 12.6% in the first quarter of 2012, more than five times faster than had been assumed.

German producer prices sank 0.3% last month and to a 2.1% 12-month rate of increase from 2.4% in April and 6.1% in May 2011.  Energy producer prices fell 0.9% on month, while all other producer prices collectively were unchanged.  The non-energy on-year PPI inflation rate slid to just 1.3% from 1.5% in April and 1.6% in February and March.

There were other signs reported of Europe’s flagging economy.

  • The Swiss ZEW expectations index fell by 39.4 points to a 5-month low of minus 43.4 in June.  Such had dropped by 6.1 points in May.
  • Italian industrial orders and sales respectively declined 1.9% and 0.5% in April and were lower than a year before by 12.3% and 4.1%.
  • Germany’s leading and coincident indices of economic indicators dropped 0.1% and 0.3% in April.
  • Consumer confidence weakened in May by 2.2 points to minus 2.6 in Denmark, 2.8 points to +3.1 in Sweden, and 2.0 points to minus 40.

Italy posted a EUR 1.14 billion current account deficit in April, significantly less than the deficits of EUR 2.4 billion in March and EUR 4.9 billion in April 2011.  Spain’s trade deficit widened 3.0% to EUR 3.4 billion in April.

South African CPI inflation slowed to an 8-month low of 5.7% in May from 6.1% in April.  Turkey’s credit rating was upgraded by Moody’s.

In addition to the FOMC’s upcoming announcement, policymakers at Norway’s central bank meeting today will announce their latest decision and views even sooner.   U.S. mortgage applications fell another 1.3% last week, and the 30-year fixed mortgage rate dipped a basis point to 3.87%.  Weekly oil inventory data will be released in the U.S. today.

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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