Concern over How Markets and U.S. Economy Will Tolerate Fed Wind-Down of QE3

May 13, 2013

Equities and bonds are reacting adversely to a WSJ article on May 10, claiming that Fed officials are starting to plan for phased reductions in monthly asset purchases (i.e., the third round of quantitative easing) but still undecided about exact timing.

In meetings over the weekend, G7 finance ministers and central bankers failed to censure Japan over the ultra-easy monetary policy that is depressing the yen, and the Europeans signaled lessening support for persistent fiscal austerity in absence of growth

Investors await U.S. retail sales data at 08:30 EDT and business inventories a bit later.  The Fed’s timetable will be data driven.

Dollar/yen is opening the week above 101 after a decisive break through 100 barrier just before the weekend.  But there hasn’t been further significant movement in the dollar.  It’s off 0.1% versus the yen and down 0.2% against the Swiss franc, unchanged relative to the euro and sterling, and up 0.1% versus the kiwi and yuan.  Today’s largest daily move in the greenback has been a 0.4% appreciation against the Australian dollar, which has slid under par.

Stocks fell sharply in some Asian markets and are down in Europe.  Losses amounted to 2.1% in India, 1.4% in Hong Kong, 1.0% in Indonesia, and 0.4% in Singapore, Taiwan, and China.  In Europe, equities slumped 1.6% in Spain and 1.0% in Italy and are also off by 0.7% in Germany, 0.5% in France, and 0.3% in Britain.

Commodities are down appreciably.  Oil lost 1.1% to $95.03 per barrel, and gold is off 0.6% at $1427.50 per ounce.

Ten-year British gilt and German bund yields have dropped two and one basis points.  Italy’s 3-year debt auction fetched a sub-2.0% yield.

Japanese stock and JGB markets are marching to a different beat.  The Nikkei rose another 1.2%, while the 10-year JGB jumped nine basis points and, at 0.78%, is 26 basis points above its level on April 8, just five weeks ago.

China released monthly data for industrial production, retail sales and business investment, all of which were comparatively close to analyst expectations.

  • Industrial output growth of 9.3% in the year to April fell between on-year increases of 8.9% in March and 9.9% in February.
  • On-year retail sales growth edged up to a 3-month high of 12.8% from 12.6% in March and 12.3% in February.
  • Fixed asset investment slowed to 20.6% on year for the first four months of 2013 from a rise of 20.9% in the first quarter and 20.7% in 2012.

Japanese money growth accelerated in April but not dramatically.  Faster money growth is a central objective of the Bank of Japan’s quantitative easing program.  M3 was 3.3% higher than a year earlier versus 12-month increases of 3.1% in March and 2.9% in the first quarter.  Broad liquidity advanced by 2.0% in the year to April after 1.6% on year in March and 1.4% in 1Q.

Home loans in Australia climbed 5.2% in March versus 2.1% in February, but the NAB index of business confidence fell by four points to minus 2 in April.  Business conditions remained depressed at minus 6 after readings of -7 in March and -3 in February.

New Zealand food prices were 0.1% softer than a year earlier in April.  Home price inflation of 9.8% was the highest since September 2007.

Swiss retail sales volume unexpectedly contracted 0.9% in on-year terms during March following a 2.3% on-year advance in February.

French business sentiment edged a point higher to 94 in April according to that nation’s central bank measure.  The Bank of France is projecting GDP growth in 1Q13 of 0.1% in both 1Q13 and 2Q13.

Ireland’s construction-sector purchasing managers index fell 1.2 points to a 7-month low of 41.9 in April.  Such a reading conveys substantial contraction.

Consumer prices in Portugal in another sign of global disinflation were unchanged on month and just 0.2% higher on year in April.

And Indian CPI inflation fell to 9.4% in April from 10.6% in March, also arriving below market expectations.

Turkey’s current account deficit of $5.4 billion in March was smaller than forecast but 9% wider than the February deficit.

Copyright 2013, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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