Another Volatile Trading Session

October 14, 2014

The dollar is stronger except against the yuan and yen.  Especially large advances of 1.0% and over 1.5% have occurred against sterling and the Swedish krona following reports of that British CPI inflation fell 0.3 percentage points (ppts) to a 5-year low of 1.2% and Swedish consumer prices, also in the year to September, had dropped 0.4%, twice as much as August’s on-year decline.  Both reports have implications for monetary policy. 

The dollar is trading 0.8% higher against the ruble, euro and Swissie and is up by 0.6% versus the Aussie dollar and 0.5% relative to the Canadian and New Zealand dollars.

European equity markets have so far extended their slide, dropping 1.6% in Italy, 1.0% in Spain, 0.9% in France, 0.8% in Switzerland, 0.6% in Germany and 0.4% in London. 

Earlier overnight, Japan’s Nikkei plunged 2.4% and to below the 15K threshold.  Japan, like Canada, had been closed yesterday.  Although the U.S. Treasury market was shut for Columbus Day, the open Dow Jones Industrials tumbled another 223 points on Monday.

Futures trading on Treasuries have depressed the 30-year to 2.94%, lowest since May 2, 2013, and the 10-year rate by 7 bps to 2.21%.  British gilt yields also are down seven basis points, and the German bund and Japanese 10-year JGB are respectively below 0.90% and 0.5%.  In Greece, where import prices were reported down 0.7% on month and 2.7% on year in August, the premium of its 10-year bond yield vis-a-vis German bunds widened to a 7-month high.  In the past three weeks, that spread has lengthened over 70 basis points.

WTI oil dropped 1.2% overnight to $84.73 per barrel, while Comex gold firmed 0.3% to $1,233.10 per troy ounce.

Markets are running on fear of weakening growth in Germany, Japan, China and other key emerging markets like Brazil and India, fear of an Ebola global pandemic, concern about an escalating western military engagement with ISIS, and a lack of confidence in the competence of political leaders to solve these and other problems.  A growing disconnection between expectations that the Federal Reserve will begin raising interest rates between March and June and a “sell everything” backdrop in financial markets hasn’t really moved to center stage yet, but it will soon become a topic of open discussion.  Remember, the Bank of Japan’s overnight money rate target hasn’t exceeded 0.5% since September 1995 not because of disinclination of monetary officials to do that but rather because Japan’s deflationary economy simply wouldn’t tolerate tightening.  It remains to be seen whether the U.S. or British economies are any better equipped to handle rising short-term rate in a world that’s more deflationary than inflationary.

The German ZEW Institute reported October readings for investor sentiment.  In Germany’s case, the expectations index swung to minus 3.6, the first negative reading since November 2012, from 6.9 in September, 27.1 in July and 49.8 in June.  The current conditions component imploded to a score of 3.2 from 25.4 in September, 44.3 in August, 51.8 in July and 67.7 in June.  For the euro area as a whole, expectations fell by 10.1 points to 4.1 (June’s reading ad been 58.4), while the perception of current conditions moved more deeply into the red, scoring 056.8 versus -43.8 in September and -27.7 at mid-2014.

Industrial production in Euroland slumped 1.8% in August, double-reversing a 0.9% rebound in July.  This was the third drop in four months, yielding a net 2.3% drop between April and August.  Output in August was also 1.9% weaker than a year earlier, and July/August average production was 0.6% lower than the 2Q mean.  A 4.3% monthly plunge in German industrial output in August dominated the report.  Ireland (-1.6%) also saw a particularly big monthly drop.

U.K. same-store sales according to the British Retail Consortium posted a 2.1% on-year drop in September.  Core British CPI inflation slid to 1.5% in September from 1.9% in August.  RPI inflation eased to 2.3%.  Producer output prices dipped 0.1% on month and 0.4% on year, while producer input prices in the U.K. recorded a monthly decrease of 0.6% and a 12-month 7.4% decline.  Finally, housing prices according to the ONS, formerly reported by the Department of Communities and Local Government kept a 12-month 11.7% rate of increase instead of accelerating as analysts were predicting.

French consumer prices fell 0.4% on month and posted a marginally smaller 0.3% annual increase.  Italian consumer prices also dropped 0.4% on month, which was associated with an unchanged 0.2% drop from a year earlier.  Spanish consumer prices likewise fell 0.2% in the year to September, while Swedish consumer prices tumbled 0.4%, leading some analysts to wonder if this might prompt the Riksbank to ease Swedish monetary policy again.

France’s current account deficit doubled on month to EUR 4.5 billion in August.  Finnish retail sales were 1.7% lower in August than a year before.

The Swiss PPI/import price index edged down 0.1% in September and recorded a 1.4% on-year drop, 0.2 ppts more than in August.

Japanese domestic corporate goods prices slid 0.1% in September after posting a 0.2% dip in August.  This cut the 12-month increase by 0.4 ppts to 3.5%.  Export and import prices respectively dropped 1.0% and 1.2% between September 2013 and September 2014.  Import price deflation was the greatest since March.

Japanese M2 money expanded 3.0% on year in both September and the third quarter, down from increases of 3.3% in 2Q and 4.0% in the first quarter.  Broad liquidity growth of 3.2% last month also remained subdued.

The National Australia Bank’s index of business confidence in that economy dropped another two points to +5 in September, half the value of June’s reading.  Business conditions slid to +1 from +8 two months earlier.

Indian wholesale price inflation dropped more than forecast and to a 5-year low of 2.38% in September from 3.74% in August.  The Reserve Bank of India used to tie policy closely to the WPI but now looks more at the CPI. 

Real GDP in Singapore rebounded 1.2% last quarter after a near-flat second quarter, but on-year growth remained at 2.4%.

The Monetary Authority of Singapore (MAS) completed its semi-annual policy review, leaving its targeted corridor for the S-dollar unchanged.  Singapore subordinateds interest rate policy to an exchange rate target.

U.S. data releases due after the Columbus Day holiday are limited to the small business sentiment index compiled by the NFIB.

Copyright 2014, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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