Chinese Central Bank to the Rescue — Really No Big Deal

August 25, 2015

The People’s Bank of China reduced its one-year lending and deposit rates by 25 basis points each to 4.60% and 1.75% while also slicing its reserve requirement ratio to 18.0% from 18.5%.  Stock markets rebounded on the news.

  • Near 10:30 EDT, key U.S. stock market indices were up by 2.5-3%.
  • In Europe, share prices gained 11.7% in Greece, 4.6% in Italy, 4.4% in Germany, 3.9% in France, 3.2% in Spain, and 3.2% in Switzerland and Spain.  The British Ftse was up 2.7%.
  • Around the Pacific Rim stocks rose 2.7% in Australia, 3.6% in Taiwan, 1.6% in Indonesia, 1.5% in Singapore, 1.1% in India and 0.9% in South Korea.
  • Ten-year sovereign debt yields jumped eight basis points in the United States, seven bps in Britain, four bps in Japan and two bps in Germany.
  • West Texas Intermediate oil increased 2.5% to $39.19 per barrel.
  • Comex gold settled back 1.6% to $1,136.47 per troy ounce.
  • The dollar has recovered 1.6% against the euro and Swiss franc, 1.2% versus the yen and 0.3% vis-a-vis sterling.
  • Commodity-sensitive currencies have a better tone, with gains of 0.8%, 0.6% and 0.2% in the kiwi, Oz, and loonie.

The strong market reaction seems to overstate the significance of the PBoC’s monetary action.  The interest rate cuts were of the same size as ones implemented in late June, May, and late February.  Back on November 21, 2014, the lending and deposit rates were cut by 40 and 25 basis points.  None of these earlier easings prevented Chinese growth from decelerating, and neither will this one.  The action came after the Shanghai Composite index dropped another 7.6% today to its lowest level since last December.  Japan’s Nikkei lost 4.0% as well.  Less noticed has been a 0.4% additional slide in China’s currency.  Remember that a 2% yuan devaluation ignited the recent bout of market hysteria.

Several U.S. indicators were reported today.

  • The Richmond Fed manufacturing index sank to a 4-month low of zero in August from +13 in July and +6 in June.
  • The Conference Board’s consumer confidence index posted a much better-than-forecast reading of 101.5 in August after dropping from 99.8 in June to 91.0 in July.  101.5 was the best score since 102.9 last January.
  • Johnson Redbook’s weekly index of chain store sales increased 0.3% last week and 1.7% on year.
  • Case-Shiller’s index of home prices in 20 metro areas ticked 0.1% lower for a second straight month and posted a slightly smaller 4.97% on-year increase than had been anticipated.
  • The FHFA house price index advanced by a smaller 0.2% on month in June and dipped 0.1 percentage point in its year-over-year change to 5.6%.
  • New home sales in July totaled 507K, near expectations and up by 5.4% on month and 25.8% on year.

Revised German GDP last quarter showed a slightly higher 0.4% quarter-on-quarter growth rate but an unchanged year-over-year pace of 1.6%.  GDP growth was powered by net foreign demand.  Exports jumped 2.2% from 1Q, and import growth of 0.8% was only half as much as forecast.  Final private domestic demand was subdued, and inventories exerted a drag on overall 2Q growth.

After announcing an unexpected 0.3-point rise to 108.3 in Germany’s August business climate index, officials at the IFO Economic Institute proclaimed the economy a “rock in turbulent waters.”  Current conditions accounted for all of August’s rise to a 3-month high, and retail was the month’s most improved sector.  The IFO services climate index leaped 4.4 points to an historical peak of 30.6 in August.

Economic sentiment in the Czech Republic fell to a 3-month l ow of 10.7 in August.  Belgian business sentiment slid a point to -5.1 in July.  Dutch business confidence fell 0.2 to a 4-month low of 3.5.  In the year to July, producer prices fell 1.3% in Spain and 0.6% in in Sweden.  Seasonally adjusted unemployment in Finland held steady at 9.6% in July but touched an 8-month low in unadjusted terms.  Polish joblessness fell for a fifth consecutive month, reaching 10.1% in July.  Austrian industrial output was 0.1% less in June than a year earlier.

Hungary’s central bank, Magyar Nemzeti Bank, left its key interest rate at 1.35%, halting five straight monthly cuts of 15 basis points each.

China’s index of leading economic indicators increased 0.9% in July.

Australia’s index of leading economic indicators fell 0.2% in July.  South Africa’s index of leading economic indicators in June was 0.6% higher on month.

South African GDP plunged 1.3% at a seasonally adjusted annualized rate between 1Q and 2Q, reversing the prior quarter’s advance and trimming the on-year growth rate to 1.2% from 2.1%.

Mexico’s current account deficit narrowed 7.1% to $7.98 billion last quarter.  Brazil posted a July current account deficit of $6.16 billion.

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

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