Bad News and Good News

August 22, 2013

The bad news came first.  Although FOMC minutes failed to embody an overwhelming message that QE tapering will begin in September with some members concerned about slippage in certain economic trends, an expression of broad support for the concept of tapering lifted long-term interest rates further and weighed on stocks in the Pacific Rim. 

  • The dollar also advanced, gaining 1.1% versus the yen, 0.8% against sterling, 0.6% vis-a-vis the Swiss franc, 0.4% relative to the kiwi and euro, and 0.2% against the loonie.  The Aussie dollar, up 0.2%, is an exception, and the yuan is steady.
  • Share prices plunged 6.0% in the Philippines, and fell 1.1% in Indonesia, 1.0% in South Korea, 0.6% in Singapore, 0.4% in Japan, 0.5% in New Zealand and Australia, and 0.2% in Taiwan and China.  Indian equities rebounded 2.3%.
  • Futures trading indicate a 2.9% handle on the 10-year Treasury yield.  Ten-year German bund and British gilt yields are up by five and four basis points, and the 10-year JGB has risen a basis point.
  • Gold fell 0.5% to $1363.90 per ounce.  Oil is 0.3% firmer at $104.10 per barrel.

The prospect of near-term monetary tightening by the Federal Reserve continues to put pressure on emerging economies.

  • The Indian rupee slipped to a new record low against the dollar.
  • Brazil’s government agreed to raise gasoline prices in order to support the faltering real.

The good news arrived in the preliminary purchasing manager results from Europe.

  • Euroland’s composite PMI rose to a 26-month high of 51.7 in August from 50.5 in July, 48.7 in June, 47.7 in May, 46.9 in April, and 46.5 in March.  The data suggest that the common currency bloc will experience its strongest economic growth this quarter since the spring of 2011.  Germany is leading the recovery, and the peripheral members are doing better, too.  France contracted at a slightly faster pace, however.  In the whole euro area, the service sector PMI reading of 51.0 showed expansion for the first time since January 2012, and the manufacturing PMI score of 51.3 also constituted a 26-month high.
  • The German PMI readings of 52.0 on manufacturing (a 25-month high) and 52.4 on services (a 6-month high) surpassed analyst expectations and resulted in a composite purchasing managers index of 53.4.  This was the best score since January and the fourth straight result to exceed the no-change threshold of 50.
  • The French composite PMI of 47.9 was closer to June’s 47.4 reading than July’s 49.1.  Manufacturing (49.7) was unchanged from July’s score and below analyst expectations.  Services (47.7) was down from 48.6 in July even though business confidence in the private sector improved to an 11-month high.
  • PMI results have so far lifted European equities by 1.8% in Spain and Italy, 1.1% in Germany, 1.0% in France and 0.8% in Britain.

China’s preliminary manufacturing purchasing managers index also delivered good news, jumping 2.4 points to a four-month high of 50.1.  This suggests that activity is stabilizing, and the news gave the Aussie dollar and stock market some lift.

Japanese stock and bond transactions generated a JPY 993 billion net capital inflow last week, swinging from an outflow of JPY 1.269 trillion in the prior week of August 10.  Japanese sold JPY 904 billion of foreign bonds, but foreigners were slight net buyers of Japanese fixed income securities.

Japanese machine tool orders were revised marginally to show a 12.2% on-year decline in July.

The Swiss trade surplus in July of CHF 2.3 billion was 15.6% smaller than June’s surplus.  The Spanish trade deficit in June widened to EUR 0.11 billion.  Danish retail sales fell 0.6% on month and were only 0.1% higher in July from a year earlier.  Seasonally adjusted Swedish unemployment dipped 0.2 percentage points to 7.8% in July, while the 7.2% unadjusted jobless rate was also 0.2 percentage points lower than in July 2012.  Dutch consumer spending recorded a larger on-year decline in June of 2.4% than in the second quarter as a whole, where the drop was 2.1%.

A member of the Bank of England’s Monetary Policy Committee, Martin Weale, envisages possible future circumstances that might warrant more quantitative easing in that economy.

According to the Conference Board, Australia’s index of leading economic indicators fell 0.2% in June.  The coincident index edged just 0.1% higher.

Scheduled U.S. data releases today include the Markit preliminary manufacturing PMI, the Conference Board’s index of leading economic indicators, the Kansas City Fed manufacturing index, the FHFA house price index, and weekly jobless insurance claims.  Canada will be reporting retail sales today and consumer prices tomorrow.  The 3-day Jackson Hole annual Jackson Hole monetary policy symposium begins today, but without Fed Chairman Bernanke’s presence.

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

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