More Good News Than Bad News

November 18, 2014

Japanese Prime Minister Abe has delayed imposition of the planned consumption tax by 18 months to April 2018 and dissolved parliament effective this Friday in preparation for a snap lower house election presumably on December 21.  Abe’s LDP/Komeito coalition was elected in December 2012 to a four-year term.  An election far ahead of schedule invites accusations of political expediency, but the fresh vote is being framed as a referendum on Abenomics.  Considering that the economy is in recession and that the Prime Minister wishes to delay a tax hike that some feel is needed to maintain trust that the fiscal deficit will be addressed, a referendum seems appropriate.  Moreover, the LDP’s opposition is currently internally fractious, unpopular, and lacking in ideas.

  • In response to Abe’s announcements, the yen has weakened 0.2%, Japanese share prices leaped 370 points of 2.2%, and the 10-year JGB yield climbed three basis  points to 0.51%.

China reported more disappointing news.  Foreign direct investment rose 1.3% on year, 0.6 percentage points less than in September and producing a 1.2% year-to-date pace of decline.  Chinese property prices fell 0.8% on month in October and by 2.5% on year, twice as much as in September.  Only three of 70 cities reported an on-year increase, down from ten cities doing so in September.  In none of the cities did prices rise on month.

  • In response, Chinese share prices fell by 1.0% and depressed several other Asian markets as well.  Equities fell 1.1% in Hong Kong, 0.3% in Taiwan, and 0.2% in Australia.

For the first time in 2014, the ZEW Institute’s index of investor sentiment toward Germany improved.  The expectations index climbed to +11.5 in November from minus 3.6 in October.  The reading was the best since July’s 27.1 but still below a long-term average score of 24.4 and down from 49.8 last June.  Current conditions edged up just 0.1 point to 3.3 and remained far beneath a reading of 67.7 last June.  Investor expectations regarding all of the euro area improved to 11.0 in November, a 2-month high after dropping 10.1 points in October.  Perceptions of current conditions in Euroland continued to weaken, however, dropping to -59.7 from -56.8 the month before and -25.6 last May.

  • The dollar in reaction has declined 0.5% against the Swiss franc and 0.4% versus the euro.  The greenback also has dipped 0.1% relative to the yuan, loonie and sterling.  Share prices in Europe have advanced by 1.2% in Germany, 1.1% in Spain, 0.9% in Italy, 0.7% in France, 0.6% in Switzerland and 0.4% in Britain.  The 10-year bund slid a basis point to 0.79%, while the 10-year gilt is up a basis point.

British inflation remained subdued in October and, more importantly, below target.  Markets no longer expect the Bank of England’s key interest rate to be lifted next month or in 1H15.  Consumer prices rose 0.1% in October and 1.3% on year with an unchanged 1.5% core inflation rate.  Retail prices were unchanged on month and held at a 2.3% 12-month rate of climb.  Producer output prices dropped 0.3% on month and 0.5% on year, and producer input prices declined 1.5% on month and 8.4% on year.

The ONS measure of U.K. house price inflation accelerated to 12.1% in September from 11.7% in August.

Comex gold is 1.5% stronger at $1,201.50 per ounce today.  WTI oil has risen 0.3% to $75.84 per barrel.

An emergency meeting of policymakers at Bank Indonesia raised the BI rate by 25 basis points to 7.75%.  Just last week the rate was left unchanged at the regularly scheduled monthly meeting, but the trigger for this reconsideration was a greater than expected 31% increase by Indonesia’s new government of fuel prices.  The new political leadership defended its action as fiscally necessary to allow for greater spending in targeted areas like infrastructure without jeopardizing the health of the overall budget.

The Central Bank of Sri Lanka left its key interest rates unchanged, calling monetary policy appropriate.

Car sales in the EU were 6.5% higher in October than a year earlier.

Italy recorded a EUR 636 million current account surplus in September, down form EUR 2.31 billion in August but much better than the EUR 2.8 billion deficit in September 2013.  Czech producer prices fell 0.4% and 0.3% on month and on year.

Scheduled U.S. data to be released today are the PPI, the National Association of Home Builders housing index and Treasury TIC statistics for capital flows.

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

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