Lower Long-Term Interest Rates and a Focus on Monetary Policies

July 18, 2012

The yields on 10-year German bunds, British gilts and Japanese JGBs edged down by three, two and one basis points.  A drop is also signaled in U.S. Treasury yields.  Over the month since June 18, German bund and British gilt yields have dropped by 21 and 18 basis points.  Treasury and JGB yields are down nine and eight basis points since June 18.

The dollar, Aussie dollar and yen firmed overnight in this continuing quest for safety.  The greenback rose 0.5% against the kiwi, 0.3% relative to the euro and Swiss franc, 0.2% versus sterling and 0.1% against the loonie.  The dollar eased 0.2% against the yen and 0.1% versus the yuan.  It’s unchanged against Australia’s currency.

Gold and oil prices eased by 0.7% and 0.4% overnight to $1578.80 per ounce and $88.83 per barrel.

Share prices are mixed in Europe, with a drop in Spain’s IBEX of 0.4% but upticks of 0.2% in the German Dax, 0.6% in the Paris Cac and 0.1% in the British Ftse.  In the Pacific Rim stocks fell by 1.1% in Taiwan and Hong Kong, 0.4% in Australia and 0.3% in Japan but rose by 0.5% in India and 0.4% in Malaysia.  Share prices were unchanged in China and Indonesia.

There has been continuing disappointment that Fed Chairman Bernanke failed to announce new easing moves yesterday.  He reprises his senate testimony today before the House Financial Services Committee.  Moreover, the Fed Beige Book of regional economic trends will be released at 18:00 GMT.

Minutes from the Bank of England’s July 4-5 Monetary Policy Committee meeting revealed a unanimous 9-0 vote to keep the Bank Rate at 0.5% but indicated a predisposition to possibly consider a cut in the future.  The last reduction in the key interest rate occurred in March 2009.  Additional stimulus since then has been administered mostly through the quantitative vehicle of asset purchases.  By a 7-2 vote, policymakers decided to increase the asset purchase ceiling to GBP 375 billion from GBP 325 billion, and the minutes showed that an increase of GBP 75 billion had also been considered.  Tucker, Bean and Weale had voted for no incremental quantitative easing at the June meeting but switched their votes.  Dale and Broadbent continued to dissent, preferring to keep the prior limit of GBP 325 billion because they were unsure that falling British inflation is fundamentally based and that such will continue.

Minutes from the Bank of Japan’s June 14-15 Policy Board meeting had a more optimistic tone.  Officials upgraded their economic prognosis even while highlighting the continuing risks out of Europe and their readiness to counter imported drags should the European situation deteriorate.  Lower JGB yields were attributed to a flight to safety, not a vote of no confidence in Japan’s economy.

The Bank of Canada will be releasing a quarterly update of its Monetary Policy Report today.  These reports tend to include lots of useful information about the Canadian economy and the assumptions being made about the global economic setting.  Canadian manufacturing shipments dipped 0.4% in May, while orders were flat.

In the euro area, construction output rebounded just 0.1% in May after tumbling 3.7% in April.  The on-year decline widened to 8.4% from 6.3% in the year to April and a drop of 6.5% between 1Q11 and 1Q12.

Released British labor statistics revealed 1) a greater-than-forecast 6.1K rise in jobless claimants in June but a steady 4.9% unemployment rate on a claimant basis; 2) a downtick in unemployment on an ILO basis to 8.1% in March-May from 8.2% in February-April; and 3) continuing sub-2% on-year increases in wage earnings with and without bonus pay during March-May.

The Swiss ZEW expectations index recovered marginally in July to a reading of minus 42.5.  Such had plunged to negative 43.4 in June from minus 4.0 in May.

Home prices in Spain fell another 2.6% between the first and second quarters of 2012 and were 8.3% below levels in 2Q11. Czech producer prices posted their first month-on-month drop since last August, dipping 0.3% and to a 12-month increase of 1.5%.  Portugal’s PPI dropped 0.7% on month in June and posted a smaller on-year increase of 2.7%.  The Italian current account printed in the red to the tune of EUR 1.199 billion in May versus a deficit of EUR 1.14 billion in April and a shortfall of EUR 5.458 billion a year earlier.

South African retail sales fell 0.8% in May, reversing April’s increase, but the drop was not as big as feared.  On-year growth of 6.4% in sales was greater than the 12-month average advance in the first four months of 2012.  South African consumer prices increased 0.2% in October, trimming on-year inflation to 5.5% from 5.7% in May and 6.1% in April.  South African consumer confidence worsened eight points to a reading of minus 3 in the second quarter.  The South African Reserve Bank reveals its interest rate decision tomorrow.  There is a Turkish central bank meeting on Thursday as well.

Australia’s index of leading economic indicators went up 0.8% in May.  The coincident economic index was 0.3% higher.

Malaysian consumer prices ticked up 0.1% in June and were 1.6% above a year earlier.

U.S. mortgage applications leaped 16.9% in the second week of July.  Figures for U.S. housing starts and building permits will be released later today, as well as the aforementioned Fed Beige Book and weekly oil inventories.  Bernanke gives the second part of his Humphrey-Hawkins testimony, and Treasury Secretary Geithner also speaks publicly.

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

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