Spotlight on Central Banks

January 21, 2015

In response to disinflationary implications of the plunge in oil prices, the Bank of Canada cut its overnight money rate target to 0.75% from 1.0%.  Oil price changes also pose downside risks to growth, which is projected to fall to around 1.5% in the first half of this year, and to financial stability.  The prior three changes in Canada’s key interest rate were hikes of 25 bps each in June, July and September of 2010.  The U.S. dollar is 1.4% stronger than its Canadian counterpart compared to last evening.

Minutes from the Bank of England monetary policy meeting of January 7-8 revealed 9-0 unanimous decisions to leave the Bank Rate at 0.5% and the ceiling on the asset purchase program unchanged at GBP 375 billion.  Since August, committee members Ian McCafferty and Martin Weale had been dissenting in favor of a 25-basis point rate hike, but they now concede that with inflation at only 0.5%, such a move could make expectations of sub-target inflation more entrenched.

The Bank of Japan left unchanged its monetary policy settings (a 0-0.10% interest rate target range, planned JGB purchases of 80 trillion yen per year, and lengthening the maturity of its JGB holdings to 7-10 years).  New macroeconomic forecasts were released, revising projected growth upward by about a half percentage point to 2.1% in fiscal 2015 and 1.6% in fiscal 2016, cutting expected core inflation in fiscal 2015, but nudging expected core inflation in fiscal 2016 upward to 2.2%.  The economic assessment is very similar to that released in December.  Officials remain confident that their monetary policy and the deep drop in oil prices will eventually have a positive effect on core inflation.  Quantitative stimulus in the near term will be maintained well beyond April 2015, the original target for securing 2% inflation. 

A report is out that the ECB will likely vote to begin quantitative easing in March at a sovereign debt purchase pace of EUR 50 billion per month to be maintained through the end of 2016.   The ECB Governing Council meets tomorrow.

Copom, Brazil’s monetary policy committee, is meeting today.

While up 1.4% against the loonie, the dollar has fallen 1.0% versus the yen, 0.5% relative to the euro and 0.4% against sterling.  The dollar has strengthened 0.9% against the Swissie and 0.1% vis-a-vis the kiwi and Aussie dollar.  The yuan is steady.

Gold earlier today went above $1,300/ounce for the first time in five months but is now down 0.2% on balance at $1,291.50.  WTI oil is unchanged at $46.39 per barrel.

Ten-year British gilts fell 7 basis points, as the Bank of England minutes cast doubt on any rate hike during 2015.  The 10-year JGB rebounded 3 bps from its record low to 0.23%.  German bunds are steady, and 10-year U.S. Treasuries have dipped a basis point.

In stock market action, China’s market leaped 4.5%, and equities rose 1.7% in Hong Kong, 1.6% in Australia, 1.0% in Indonesia, and 0.7% in Taiwan.  Stocks in Europe have dropped 2.8% in Switzerland and 0.3% in Germany but are up 0.8% in the U.K. and 0.3% in Italy.  U.S. stocks are not much changed at the open but the Toronto market jumped 1.2% on the news of the Bank of Canada rate cut.

President Obama’s State of the Union address was confident in tone, adversarial versus his Republican opponents, and broad in content.  He introduced the concept of Middle Class Economics, intended to promote incomes and opportunity of anyone make a strong effort to get ahead.

Consumer prices in New Zealand slid 0.2% last quarter, resulting in a 4Q-over-4Q increase of only 0.8% in 2014, half that in 2013 and down from 4.0% in the year between 4Q09 and 4Q10.

Consumer confidence in Australia jumped by 2.4% in January after declining 5.7% in the final month of last year.

Japanese supermarket sales were 1.8% lower than a year earlier in December.  Earlier this week, a 1.7% on-year drop was reported for department store sales.

Japan’s index of leading economic indicators was revised up 0.1 points to 103.9 in November, and the index of coincident economic indicators was revised to 109.2 from 108.9 reported originally.  Both revised figures were lower than October readings, however.

Japan’s all industry index, a monthly supply-side proxy for GDP, edged up 0.1% for a second straight time in November.  Services grew 0.2%, but industrial production, construction and public sector output each weakened a bit.  The all-industry index posted a 12-month decline of 1.9% after drops of 0.9% in October and 1.6% in 3Q14.

British labor statistics showed an acceleration of wage inflation and another bigger-than-expected drop in jobless claimant requests.  Total and regular pay in September-November were 1.7% and 1.8% greater than a year before.  The claimant count fell by 29.7K in December and was associated with a lower unemployment rate of 2.6%(lowest since mid-2008).  The standardized ILO estimation of unemployment in September-November was 5.8%, down 0.2 percentage points and the smallest reading since June 2008.

U.S. housing starts increased 4.4% to 1.098 million in December and averaged 1.006 million in all of 2014, up 8.8% from 2013.  Building permits fell 1.9% in December and rose 4.2% in 2014.  Mortgage applications increased 14.2% last week.

Home prices in the euro area climbed 0.3% in the third quarter and were 0.5% greater than in 3Q13.  Germany’s index of leading economic indicators improved 0.4% in November, buoyed by falling energy prices and the cheapening euro.

Consumer price inflation in Malaysia slowed to 2.7% last month from 3.0% in November.  South African consumer prices dipped 0.2% in December and posted a smaller 12-month rise of 5.3%. Polish producer price deflation deepened in December with a 12-month 2.5% rate of price decline. 

Swiss M3 money growth slowed to 3.3% last month from 3.6% in November, and the Swiss ZEW index of investor expectations worsened to a reading of minus 10.8 in January after –4.9 in December.

Brazil’s indices of leading and coincident economic indicators each stagnated in December, according to the Conference Board.

Wholesale sales in Canada contracted 0.3% in November and posted a smaller year-over-year rise of 6.7%.

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

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