China Drops Bombshell on Financial Markets

August 11, 2015

The Chinese renminbi was devalued 1.9%, and central bank officials there announced that the currency henceforth would be allowed to reflect market forces to a much greater extent.  Intervention previously had been employed to prop of China’s currency amid weakening exports and lessening overall economic growth.  This change comes just over a year after the renminbi’s fixed peg at 8.277 per dollar was removed.  Before today’s move, the yuan was trading at around 6.21.  It is now at 6.3235 and 6.393 in Hong Kong offshore trading.  In taking today’s action, monetary officials are conceding mounting concern about the failure to stop growth from slowing and the persistence of sub-target inflation, but they also assuming the risk of heavier capital outflows.  Worries about China had just last week delayed the IMF to render a decision on the renminbi’s status as a reserve currency.

China’s reflationary thrust poses a deflationary risk to its trading  partners.  Ten-year sovereign debt yields are down today by nine basis points in Great Britain, 7 bps in the United States, 4 bps in Germany and 31 bps in Greece, where the government succeeded in securing its third major bailout package (this of EUR 86 billion).

The dollar has strengthened 1.5% against the Aussie dollar and 1.0% versus the kiwi.  Other Asian emerging market currencies like the won and Singapore dollar have declined sharply, but U.S. dollar movements have been more muted against the yen (+0.2%), sterling (+0.1%), euro (-0.4%) and Swissie (no change).  The loonie fell 0.7%.

West Texas Intermediate crude oil slumped 2.9% to $43.65 per barrel.  Comex gold is 0.3% firmer at $1,107.90 per troy ounce.

Share prices are broadly lower, with declines of 1% in the United States, Spain and Canada, 2.7% in Indonesia, 2.3% in Germany, 1.4% in Singapore, 1.5% in France, 0.8% in Italy, New Zealand,Switzerland and South Korea, 0.9% in Taiwan and 0.7% in Australia.

Chinese bank lending growth of 1.48 trillion yuan last month was at a 6-month high, and M2 and M1 money growth accelerated more than forecast to on-year advances of 13.3% (most this year) and 6.6% in July.

Japanese M2 growth picked up to 4.1% in July from 3.9% in 2Q, 3.5% in 1Q and 3.4% in 2014. Japanese machine tool orders posted on-year growth of 13.3% in July, a 2-month high.

Real GDP in Singapore slumped 4.0% on quarter in 2Q, reversing a 4.2% rise in the first quarter of 2015 and yielding a gain of 1.8% from the second quarter of 2014.

Australian business confidence and business conditions weakened in July according to the monthly NAB compilations.  The latest readings were +4 on confidence, down from +8, and +6 on conditions, down from +10 the month before.

Germany’s ZEW expectations index, a measure of economic sentiment toward the largest economy in Europe, weakened for a fifth straight time in August, falling 4.7 points to a 9-month low of 25.0.  That’s very near the long-term average of 24.9 and prompted ZEW officials to blame geopolitical and global economic uncertainties and to declare that “a substantial improvement of Germany’s economy over the medium term is improbable.”  Current conditions nonetheless edged 1.8 points higher to 65.7.  Regarding the whole eurozone, the ZEW expectations index improved to 47.6, a 2-month high, from 42.7, and current conditions went up 4.1 points to negative 10.3.

German wholesale prices ticked 0.1% higher in July but remained 0.5% lower than a year earlier.

U.S. productivity rebounded last quarter but less sharply than forecast, rising 1.3% after tumbling 2.2% in 4Q14 and then another 1.1% in the first quarter of 2015.  Productivity, which was flat in 2013 and up just 0.7% in 2014, climbed only 0.3% between the second quarters of 2014 and 2015.  Unit labor costs advanced 2.1% on year in 2Q, similar to the 2.0% 2014-over-2013 increase.

U.S. chain store sales rose 0.5% last week and 1.9% from a year earlier according to the Johnson Redbook weekly index.

Canadian housing starts fell to a three month low of 193K at an annualized rate in July. Mexican industrial output increased 0.2% on month but just 0.6% on year in June.

Ireland’s construction purchasing managers index eased to a three-month low of 59.1 in July after 65.7 in June and 63.3 in May.

Britain’s index of leading economic indicators was unchanged in June, and the index of coincident economic indicators fell by 0.2%.  The Bank of England is apparently waiting until 2016 before considering a rate hike, and one has to wonder how much the plans of other central banks will be changed by today’s yuan devaluation.

In the year to July, consumer prices rose 0.2% in Italy 0.4% in Hungary but fell 2.4% in Cyprus and 1.7% in Romania.

Turkey’s current account deficit narrowed 16% to $3.36 billion in June.  Factory output in South Africa slipped 0.4% in the year to June.

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


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