Swiss National Bank Lights a Firestorm and India’s Central Bank Also Surprises

January 15, 2015

There’s been a whole lot of shaking going on in world financial markets overnight.

Dollar/Swissie plunged 14.2%, and Swiss equities have slumped 9.5%.  The trigger for these big moves was the Swiss National Bank’s abandonment of its 1.2000 franc per euro ceiling, which was imposed initially on September 6, 2011.  The cost of intervention was deemed prohibitive, and Swiss monetary officials said the currency had meanwhile become less overvalued.  At the same time, the Swiss central bank reduced its target on the 3-month Swiss Libor interest rate to a point estimate of -0.75% from zero, with a range of -1.25% to -0.25%.

In an unscheduled move, the Reserve Bank of India accommodated government desires by reducing its repo rate to 7.75% from 8.0%.  The reverse repo was sliced similarly to 6.75%.  RBI Governor Rajan upon taking office in 2013 had overseen increases of 25 basis points each in September and October of that year as well as in January 2014.  CPI inflation has recently dropped discernibly in India, and the government has taken efforts to rein in fiscal deficit spending.  India’s stock market rallied 2.7%, and the rupee rose, too.

The yen strengthened 0.7% against the dollar, touching a high of 116.24 overnight.  The euro hit a high against the yen overnight of 135.75.  Japan paradoxically reported two very disappointing data items.

  • Core domestic machinery orders in Japan increased only 1.3% in November, a third of street forecasts, following a 6.4% drop in October.  The average in October-November was 2.6% lower than the 3Q mean.  Meanwhile, public-sector orders for machinery in the two months were just 0.7% above the 3Q level, and foreign orders were 6.2% below.  These data compelled government officials in Tokyo to warn of “signs the economy may be stalling.”
  • Japanese domestic corporate goods price inflation slowed to a 9-month low of 1.9% in December from 2.6% in October.  When a 3-percentage point sales tax hike was imposed last April 1, the CGP leaped to 4.1% that month from a pace of 1.7% in March, and CGP inflation, analogous to a PPI, crested in June at 4.5%.  In month-on-month terms, corporate goods prices declined in each month of 4Q and haven’t risen since July.  Meanwhile, import prices fell in December by 3.2% on month and 9.0% on year.

Besides the double-digit tumble against the Swiss franc overnight, the dollar fell 2.2% against the kiwi, 1.7% relative to the Australian dollar, 1.2% versus the loonie, 0.7% against the yen and 0.1% vis-a-vis sterling.  The dollar rose 0.5% against the euro and is unchanged relative to the yuan.

Asian stock markets had their best session since November.  Stocks gained 2.7% in India, 2.9% in China, 1.9% in Japan, 1.0% in Hong Kong, and 0.6% in Indonesia.

Stocks in Europe have climbed 1.9% in Italy, 1.2% in France, 1.1% in Germany, 0.9% in Spain and 0.6% in Britain.

Gold shot up 1.6% to $1,253.80 per troy ounce, buoyed in part by the sharp advance of the Swiss franc.  The franc and gold have historically been sought as hedges against unreliable paper monies.

WTI oil rallied 0.8% to $48.88 per barrel.  Ten-year sovereign debt yields firmed a basis point in Britain, Japan and Switzerland.  The 10-year German bund is two basis points higher.

Chinese money and bank lending growth in December fell short of expectations.  On-year 12.2% growth of M2 was down from 14.7% last June and represented a 9-month low.  M1 and M0 were only 3.2% and 2.9% above December 2013 levels.  Yuan loans rose by 697 billion last month, 22% less than forecast and 18% less than in November.  Chinese foreign exchange reserves fell by $47.7 billion last quarter to $3.84 trillion.  Such had risen $41.9 billion in 2Q14 but fell $102.3 billion in 3Q despite sizable trade surpluses in the second half of the year.

German real GDP expanded 1.5% in 2014 after gains of 0.1% in 2013, 0.4% in 2013, and an average pace of 1.2% over the ten years through 2013.  0.4 percentage points of growth came from net exports, and the rest stemmed from domestic demand including a 0.3 percentage point drag from inventories.  Germany had a fiscal surplus last year equal to 0.4% of GDP, up from 0.1% of GDP in 2013.

Australia recorded a 4-month low in its jobless rate last month of 6.1%.  Employment climbed by 37.4K, far above street expectations of a 5K advance.  This was the second substantial upside surprise in a row.  The labor participation rate also increased, reaching 64.8%.

New Zealand food price inflation accelerated to 1.0% last month from 0.6% in November, while house price inflation remained at 6.0%.

Wholesale turnover in South Africa dropped 3.0% on month in November and recorded a much bigger year-over-year decline of 7.1%.

Euroland registered a record high trade surplus in November of EUR 20.0 billion, but month-on-month changes in exports of +0.2% and imports of 0.0% were meager.

Irish CPI inflation of -0.3% last month turned negative for the first time since February.  Spanish consumer prices dropped 1.0% between December 2013 and December 2014.  Danish producer prices declined 4.3% over the same period. 

Retail sales in Singapore slid 0.7% in November and slowed to a 12-month increase of 6.5% after 8.1% in the year to October.

Norway’s NOK 337 billion trade surplus in 2014 was 11% smaller than in 2013.

U.S. PPI data were close to expectations.  The overall index fell 0.3% on month and to a 12-month pace of +1.1% in December from 1.4% in November and 1.9% last August.  Core PPI rose 0.2% on month.

New U.S. weekly jobless insurance claims unexpected rose 19K to 316K last week, lifting the 4-week average by 7K to 298K per week.

Reminiscent of last September, The Empire State manufacturing index reversed a big December decline, rising from -1.23 to a score of 9.95 in January.  The index had dropped 10.9 points in August but then rose 12.9 points in September.  Other U.S. data getting reported today are the Philly Fed manufacturing index, the NAHB housing market index, and Treasury-compiled statistics on capital flows with other countries.

Serbia, Chile and Peru hold monetary policy meetings today.  The Davos World Economic Forum is next week.

Copyright 2015, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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