Concerns about Rising Chinese Interest Rates

October 25, 2013

Short-term Chinese money market rates climbed higher overnight to multi-month highs.  The People’s Bank of China introduced a new prime lending rate.

Key data releases this Friday include Japanese consumer prices, the German IFO business climate index, British 3Q GDP, and Euroland money and credit.

Comments from the governor of the Reserve Bank of New Zealand sent the kiwi lower.  Governor Wheeler insinuated that the onset of interest rate normalization may occur later than had been assumed. 

A German member of the ECB Governing Council indicated that euro appreciation so far is within historical norms and therefore not a significant concern to him.

Japan’s Nikkei slumped 2.8%.  In other markets in the Pacific Rim, share prices fell by 1.3% in China, 0.8% in Taiwan, 0.7% in the Philippines, 0.6% in South Korea and Hong Kong, 0.4% in Singapore, 0.3% in Indonesia, and 0.2% in India.  Stocks climbed 0.6% in New Zealand and 0.3% in Australia but are so far down by 1.0% in Italy, 0.6% in Spain, 0.3% in France, and 0.1% in Germany.  The British Ftse has edged 0.1% higher.

The 10-year German bund and British gilt yields are steady.  The 10-year Japanese JGB is up a basis point.

Gold is unchanged at $1350.20 per ounce.  The price of WTI crude oil firmed 0.4% to $97.49 per barrel.

Dollar sentiment remains guarded.  There were rumors of diversification into the euro.  EUR/USD continues to straddle $1.3800.  The U.S. currency climbed 0.6% against the kiwi, 0.3% versus the Aussie dollar, 0.2% against the loonie and 0.1% relative to the Swiss franc.  The dollar is flat versus the euro, yuan, and sterling and 0.1% softer against the yen.

Japanese total consumer prices rose 0.2% seasonally adjusted in September and accelerated to a 12-month increase of 1.1%.  That’s the most since March 1998, the last month buoyed by the sales tax increase of April 1997.  Excluding that distortion, September’s inflation rate is the highest since March 1993.  Core consumer prices, which exclude fresh food, slid to 0.7% from 0.8% in August, but the CPI inflation rate excluding energy as well as fresh food ticked up to zero, its high-point since 2008.  Tokyo CPI inflation in October was at 0.6% for all items, 0.3% excluding fresh food, and negative 0.2% excluding energy and fresh food.

Japanese corporate service prices were unchanged on month in September and recorded a 12-month increase of 0.7% for the second time in a row.

The IFO institute of Germany reported an unexpected slight 0.3-point dip in the German business climate index to a three-month low of 107.4 in October.  That was the first decline in the index since April’s 104.4.  The current situation edged 0.1-point lower.  Expectations fell by 0.6 points, but that component was still 10.2 points higher than in October 2012.  The biggest deterioration involved the retail sector.  IFO’s service climate index also fell, dropping to 15.5 in October from 19.0 in September.  German real construction orders fell 5.0% between August 2012 and August 2013 but managed a 1.4% advance in January-August from a year before.

The advance estimate of British GDP last quarter showed as-expected growth of 0.8%, the best quarter-on-quarter increase since the second quarter of 2010.  On-year growth remained at 1.5%.  Construction expanded 2.5% in the quarter, while the service sector and production sector respectively went up by 0.7% and 0.5%.  The services index in August-October was 0.6% greater than in May-July.

M3 money in the euro area climbed 2.1% on year in September and by 2.2% in 3Q, down from 2.3% in August and 2.8% in the second quarter.  Credit and loans to the private sector were respectively 1.1% and 1.9% below their year-earlier levels in September.  Mortgage loans posted a 0.8% 12-month rate of increase, while lending to non-financial firms slumped by 3.5% in the last 12 months.  All in all, very subdued trends continue, and a further interest rate cut cannot be ruled out.

Italian retail sales were flat on month but posted the first on-year rise since mid-2012, albeit an uptick of just 0.2%.  Austrian industrial production fell 0.5% on month and by a greater 1.4% on year in August.  Dutch business sentiment rose 2.3 points to -0.5 in October, highest in two years.

Spanish producer price inflation swung to a 12-month 0.1% rise from a 0.1% dip in August.  Icelandic consumer price inflation slowed from 3.9% in September to 3.6% in October.  The Greek trade deficit of EUR 1.15 billion in August was little changed from July.  Swedish consumer confidence improved 4.1 points to a reading of 102.0 in October.

South Korean GDP grew twice as fast as assumed in 3Q, gaining 1.1% from 2Q and 3.3% on year.  Industrial output in Singapore climbed 3.7% on month and 9.3% on year in September.  Malaysian CPI inflation picked up to 2.6% in September from 1.9% the month before.  The Filipino trade deficit widened 48% to $961 million in August. 

Central bank interest rate policy decisions will be revealed today in Mexico and Colombia.

Scheduled U.S. data releases will cover durable goods orders and the U. Michigan/Reuters consumer sentiment index.

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

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