A Broadening Sense of Relief

July 13, 2016

Global stocks recorded a fifth straight session of appreciation.  Industrial commodities continued to rally as well. The dollar is marginally softer.  Investors are relieved that the succession of British governments is occurring more quickly than feared and feel confident that Theresa May is the right person to lead the U.K. through its exit from the European Union.  At the same time, investor confidence has also been restored by indications that governments and central banks stand ready to counter slowing global growth and, equally important, that such efforts will yield more success than macroeconomic stimulus has managed to accomplish since 2007.

Expectations are rife that the Bank of England’s 0.5% interest rate could be cut tomorrow.

Share prices rose 1.2% in Japan, 0.7% in Australia, South Korea and Indonesia, 0.5% in Hong Kong and 0.4% in China.  Stocks in Europe have risen so far by 1.7% in Greece, 0.5% in Italy, 0.4% in France and Spain, 0.2% in the U.K. and 0.1% in Switzerland and Germany.  The DOW and S&P closed Tuesday at record highs.  More broadly, stocks around the world have generally recouped all of their post-Brexit lows and then some.

The dollar is down 0.4% against the Swiss franc, 0.2% versus the kiwi and euro and 0.1% relative to the yen, sterling and Australian dollar.  The yuan is steady with no reaction to China’s release of June trade data.  The loonie has dipped 0.1% ahead of the Bank of Canada’s interest rate decision announcement.  While share prices have bounced back, sterling’s big post-Brexit drop remains mostly intact as it trades at $1.3140 versus a high of $1.5019 just before the referendum results were learned.

The 10-year British gilt fell seven basis points to 0.76%.  Such was at 1.37% on June 23, the day of the referendum. The 10 year Treasury yield is four basis points lower.  The DOW opened initially with a dip on some profit-taking.  10-year German and Japanese sovereign debt yields are still below zero at -0.07% and -0.29%.

Comex gold firmed 0.5% to $1,341.50 per ounce.  Copper continued to soar overnight.  West Texas Intermediate crude oil fell back 1.0% to $46.32.

Cleveland Federal Reserve President Mester expressed relief about the strong rebound in U.S. employment growth last month.

Japan’s government halved projected GDP growth this fiscal year to 0.9% from an estimate of 1.7% made six months ago.  CPI inflation is now expected to be only 0.4% in fiscal 2016, down from a forecast before of 1.2%.  A big fiscal stimulus is coming, and plans for a consumption tax hike next year have been put off.  A more expansionary BOJ stance also is widely expected perhaps to be unveiled with the Policy Board meets next at the end of this month.

The plunge in Japanese industrial production in May was revised to 2.6% from 2.3% reported two weeks ago. Output was 0.4% lower than in May 2015.  Capacity utilization dropped 2.4% on month and 1.2% on year.

Eurozone industrial production sank 1.2% in May, which cut the 12-month increase to 0.5% from 2.2% in April.  The largest economies sharing the euro — Germany, France, Italy, Spain and The Netherlands — each experienced a monthly decline of industrial output during May.

China posted a $48.11 billion trade surplus in June, similar to surpluses of $49.98 billion in May and $45.56 billion in April.  Exports were 4.8% smaller than a year earlier, and imports posted a much larger on-year drop of 8.4% versus a 0.4% dip between May 2015 and May 2016.  Imports were also weaker than street expectations.

The Australian consumer confidence index compiled by Westpac suffered a 3.0% drop in June.  That was the third decline in the past four months.  New Zealand food prices in June were 0.5% lower than a year earlier despite a 0.4% increase from May’s level.

U.S. mortgage applications rose 7.2% last week as the 30-year fixed mortgage rate declined another six basis points to 3.60%.

France, Italy, and Spain reported June consumer price data.  On-year inflation in those economies respectively stood at 0.2%, negative 0.4%, and negative 0.8%.

The Bank of Canada did not loosen monetary policy as some thought was possible but had this to say in summing up its latest decision:

The risks to the profile for inflation are roughly balanced, although the implications of the Brexit vote are highly uncertain and difficult to forecast. At the same time, financial vulnerabilities are elevated and rising, particularly in the greater Vancouver and Toronto areas. The Bank’s Governing Council judges that the overall balance of risks remains within the zone for which the current stance of monetary policy is appropriate, and the target for the overnight rate remains at 1/2 per cent.

Bank Negara Malaysia did ease its monetary stance, however, cutting the overnight policy interest rate to 3.0% from 3.25%.  Such was the first rate reduction since February 2009.  Five intervening 25-bp rate hikes were engineered between March 2010 and July 2014.

In the year to May, industrial production rose 4.2% in Hungary but fell 1.6% in Romania.

South African retail sales increased 3.4% on month and 4.5% on year in May.

U.S. import prices rose 0.2% last month, down from a 1.4% jump in May and only half as much as the on-month expected increase.  Between mid-2015 and mid-2016, import prices fell 4.8%, just half the drop in the previous twelve months.  Fuel prices, which had plunged 40.1% in the year to June 2015, fell by an additional 26.0% in the year to June 2016 despite on-month advances of 9.8% in April, 14.9% in May and 6.2% in June.  Non-fuel import prices dropped 1.8% in the year to June 2016, while export prices slipped 3.5%.

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


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