Big Further Drop in Sovereign Debt Yields

July 1, 2016

A bond market rally based on expected monetary stimulus from a variety of authorities and other pro-growth support has taken hold of world financial markets.  Commodities are up, too.  The dollar is down, and profit-taking in U.S. stocks is indicated despite higher share prices in Asia and Europe.

Bank of England Governor Carney gave an important speech.  He does not plan to resign even if a very committed Leave government takes office, and he want to enact significant stimulus this summer.  No new progress has been made toward establishing rules to govern Britain’s new relationship with the EU.

Data releases were dominated this first day of July by the Bank of Japan Tankan survey of corporate conditions, a slew of other Japanese statistics, and June manufacturing purchasing managers surveys.  In many cases, the data were collected prior to the British referendum and thus already out of date to some extent.

Markets in Hong Kong (Establishment Day) and Canada (Canada Day) are closed.

The dollar has lost 0.7% against the yen, 0.6% relative to the kiwi, 0.4% versus the Aussie dollar, 0.3% vis-a-vis the Swiss franc and 0.2% against the euro.  The dollar shows a net 0.3% advance against sterling, which fell even further intra-day on Carney’s remarks, and it has risen 0.2% against the Chinese yuan on top of a 3.0% appreciation during the second quarter.  The yuan is at more than a 5-year low.

The 10-year Treasury yield is at 1.42%, a 5-basis point indicated likely lower open.  Like the 30-year, such is in record-low territory.  10-year sovereign debt yields fell 22 bps in Greece, 3 bps in Italy, Britain and Spain, and 4 bps in Japan, which is now negative 0.27%.

Gold shot up another 1.3% but was easily outdistanced by silver, which leaped more than 3%.  Oil sagged 0.7% to $47.98 on WTI crude.

Share prices closed up 0.7% in Japan, 0.9% in South Korea, 0.8% in Taiwan and 0.5% in India and New Zealand.  In European bourses, stocks have risen 0.7% so far in France, Germany, and Switzerland, 0.6% in the U.K., 1.2% in Spain, but just 0.1% in Italy.

The Bank of Japan’s quarterly Tankan survey showed an unchanged +6 diffusion index on large manufacturing business conditions, but the indices for smaller firms and for large manufacturers did move somewhat lower. Projected investment spending was revised upward, but earnings prospects are dimmer.

In other Japanese data released today,

  • Consumer confidence rose 0.9 points to a 5-month high of 41.8, but that was before the recent yen upsurge.
  • The jobless rate was 3.2% in May for the fourth time in the past five months.  Employment recorded on-year growth of 0.7%, down from 0.9% in April but above 0.3% in March.  The job offers-seekers ratio edged up another 0.02 points to 1.36.
  • Real household spending dropped more sharply on year in May (1.1% versus a dip of 0.4% in April) and was down 1.5% on month in seasonally adjusted terms.  Real disposable incomes were 3.9% weaker in May than a year earlier.
  • The manufacturing purchasing managers index rose 0.4 points unexpectedly in June but, at 48.1, still connoted a trend of contracting activity.  Input price deflation was the most severe in just over two years.
  • Motor vehicle sales grew 3.0% on year in June, less than half as much as such had in May.

Late Thursday, the Bank of Mexico raised its key interest rate by 50 basis points to 4.25%.  An initial 25-basis point hike last December was followed by a 50-bp augmentation at an unscheduled meeting in February.  Peso vulnerability threatens higher inflation.  Yesterday’s decision is the third tightening of the cycle.  Previously, the rate was lowered from 8.25% starting in January 2009 to 3.0% after a 50-basis point cut in October 2014.

Euroland’s manufacturing purchasing managers index for June was revised up 0.2 points from the flash estimate to 52.8, a six-month high and 1.3 points greater than in May.  The data do not reflect the Brexit verdict, and France remains in troublesome shape with the only sub-50 score in the group, a 2-month low of 48.3.  Germany led the pack with a 28-month high of 54.5, followed by Austria’s 61-month high of 54.5, Italy’s 2-month high of 53.5, Ireland’s 3-month high of 53.0, Spain’s 2-month 52.2 peak.  Then there is The Netherlands’ 52.0, representing a 4-month low.  Greece returned to a 50 handle for the first time since January and with a score of 50.4 had the best reading in 26 months.

Three Chinese purchasing manager surveys were published.  The government-authorized manufacturing and non-manufacturing readings were at 50.0, a 4-month low, and 53.7, a 3-month trough, respectively.  The Caixin private PMI report for manufacturing produced a 4-month low of 48.6 and faster declines in orders, production and input prices.

Elsewhere in the Pacific Rim,

  • Taiwan’s manufacturing PMI swung from a 7-month low in May of 48.5 to a 3-month high of 50.5 in June.
  • Indonesia enjoyed a 23-month high in its factory PMI of 51.9, up from 50.6.
  • Malaysia’s 47.1 PMI dipped 0.1 point on month and matched April’s 5-month low.
  • Vietnam’s PMI slipped to a 2-month low of 52.6 from a 1-year high of 52.7 in May.
  • India’s manufacturing PMI rebounded a full point to a 3-month high of 51.7.
  • Australia posted a 51.8 on its Performance of Manufacturing index, up from a 7-month low of 51.0 in May but below April’s score.

Among other European PMIs released,

  • The Czech reading plumbed to a 3-year low of 51.8 from 53.3 the month before.
  • Poland’s 51.8 in June was a 2-month low.  Hungary’s 50.9 was down 1.3 points and at a 6-month low.
  • Russia’s PMI improved to a 19-month high of 51.5, emerging from a string of sub-50 and hence contractionary results.
  • Turkey’s PMI, on the other hand, slumped 2.3 points to an 86-month low of 47.4.
  • The British factory PMI beat expectations with a 5-month high of 52.1 but now faces the shock of Brexit.
  • The Swiss PMI fell sharply to 51.6, a 4-month low, from 55.8.
  • Sweden’s PMI dropped a full point to 53.0, a 4-month low.
  • But the Norwegian PMI of 53.5 was at a 5-month high.

Euroland unemployment ticked down 0.1 percentage point to 10.1% in May, which still hovers near the U.S. Great Recession peak.  In May 2015, eurozone had an 11.0% jobless rate.  Youth unemployment still exceeds 20.0% a bit.

Swiss retail sales volume increased in May for the first time this year but was still 1.6% lower than a year earlier.

Czech on-year GDP growth slowed to 3.0% last quarter from 4.0% the quarter before.

In some Asian price news, South Korean CPI inflation stayed at 0.8% last month. Indonesian consumer prices rose 3.45% in the year to June, while consumer prices in Thailand were just 0.4% higher on year.

Still to come:  the U.S. manufacturing PMI and construction spending.

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


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