Plenty for Investors to Fret About

February 2, 2016

Fed Vice Chair Stanley Fisher, heretofore a solid defender of the Fed’s December rate increase and need for several follow-up moves in 2016, conceded that the global outlook continues to darken and that just maybe markets, rather than Fed officials, may have been right in assessing the advisability of tightening and understanding what the U.S. and global economies can bear in the way of Fed rate normalization.

The Iowa Caucus produced a dual surprise.  On the Republican side, Texas Senator Ted Cruz beat Donald Trump, who in turn barely edged out Marco Rubio to take second-place honors.  On the Democratic side, former Senator and Secretary of State Hillary Clinton and Vermont Senator Sanders came as close as possible to a tie.  It appears that Clinton marginally won more votes, but given the length of her lead six months ago, the history of the 2008 election and the fact that Sanders is expected to capture the N.H. primary next week, the moral victory goes to him.  With so many other market concerns, investors were not well prepared for more U.S. political uncertainty.

West Texas Intermediate oil sank 3.0% overnight to $30.68 per barrel.  Even gold edged 0.3% lower to $1,124.55 per troy ounce.

European corporate earnings reports have been delivering mostly disappointing news.

The Reserve Bank of Australia’s first interest rate policy meeting in two months left the Official Cash Rate unchanged at a record low 2.0%, but released a statement noting bigger concerns about world financial turbulence and China’s slowdown and concluding that an additional policy easing in the future may become appropriate.  Between November 2011 and May 2015, the OCR was reduced from 4.75% to 2.0% in ten steps.

Worry about China was accentuated Monday by both measures of China’s manufacturing purchasing managers index recorded sub-50 readings in January, indicating a continuing contraction in the world’s second largest economy.  The government’s index slipped 0.3 points to 49.4, while the Caixin-compiled measure printed at 48.4, matching the fourth quarter’s average.  The government’s non-manufacturing PMI, meanwhile, fell 0.9 points to a reading of 53.5, lowest since October.

Producer prices in the eurozone underscore the region’s excessive disinflationary landscape.  The PPI fell by a greater-than-forecast 0.8% on month in December.  On average, the PPI plunged at an annualized 5.0% between the third and fourth quarters.  The December-over-December PPI decline of 3.0% was even greater than the 2.7% slide over the previous twelve months to end-2014.

Investors are also worried about a British referendum vote later this year that could take that nation out of the European Union.

The danger of hotter currency wars hangs over the market place.  Emerging market currencies fell significantly further overnight.

European share prices are experiencing another difficult session, with declines thus far of 1.9% in Spain, 1.8% in France and Italy, 1.6% in the U.K., 1.5% in Switzerland, 1.3% in Greece and 1.1% in Germany.  Whereas China’s stock market recovered 2.3%, other selected markets around the Pacific Basin suffered losses of 1.2% in India, 1.0% in Australia and South Korea, 0.9% in Singapore, 0.8% in Indonesia and 0.6% in Japan.  U.S. futures point to a decline.

Among 10-year sovereign debt yields, there have been overnight declines of three basis points in the U.K., two bps in the United States and Germany, and one basis point in Japan.

Against commodity-sensitive major currencies, the dollar has climbed 0.8% against the kiwi, 0.7% versus the Australian dollar and 0.4% vis-a-vis the loonie.  The greenback is stronger by 0.2% against the Swiss franc and 0.1% relative to sterling but down 0.2% against the euro and 0.1% versus the yen.  The yuan is steady, supported no doubt by more intervention.

The Reserve Bank of India left unchanged its repo rate at 6.75%, reverse repo at 5.75%, and reserve ratio at 4.0%.  Officials are continuing to monitor a lot of factors — wages, prices, oil, and the domestic budget among other things — and will be guided in the future by what they learn.  The last rate change was a 50-basis point rate cut in September that brought cumulative reductions in 2015 to 125 basis points.

The latest batch of German labor statistics was better than forecast.  Unemployment fell 20K in January following declines of 16K in December, 15K in November and 7K in October.  The jobless rate, which had been 6.3% in each month of the last quarter, slid to a new low for the move of 6.2% in January.  Employment posted a rise of 0.1% in December from November and 1.0% from a year earlier.  On-year growth in jobs was 1.0% in 4Q versus 0.8% in 3Q, 0.7% in 2Q and 0.6% in the first quarter of 2015.

Eurozone unemployment ticked downward to 10.4% in December from 10.5% in November 11.4% in the final month of 2014 and 11.8% in December 2013.

Swiss retail sales volume increased 1.1% in December, reversing a 0.6% drop the month before, but still recorded a 1.6% December-to-December drop.  The Swiss franc has been creeping lower against the euro.

South Korean consumer prices were flat on month in January, depressing their 12-month rate of increase by a half percentage point ot 0.8%.

Japan’s balance sheet widened JPY 13.3 trillion last month, or 3.5%.  But on-year growth in Japan’s monetary base of 28.9% in January was down from 29.5% in December, 31.5% last quarter, 33.7% in 3Q15, 34.0% in full-2015 and 43.2% in 2014.  The Bank of Japan adopted a marginally negative overnight money rate last week but did not augment the size of quantitative stimulus, which has been at 80 trillion yen annually since end-October 2014.

Scheduled U.S. data releases today include weekly Redbook chain store sales, the NAPM New York area purchasing managers index, and the IBD/TIPP optimism index.  K.C. Fed President Esther George speaks publicly.

Copyright 2016, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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