Message of Jackson Hole Didn’t Stick

September 6, 2016

Speeches and various comments emerging from the Jackson Hole Symposium late last month had been coordinated to plant in investors’ minds the notion that the Fed would be raising its interest rate sooner than assumed and that two hikes before yearend in fact remained possible. The shift in market psychology was only fleeting, however, and the takeaway less than two weeks afterward is that tightening will continue to proceed very gradually.

Accordingly, the dollar has settled back especially against emerging market currencies. It’s down today by 1.5% against the rand 0.6% versus the Australian dollar, and 0.4% relative to the kiwi and sterling. There’s been no change, however, in the dollar’s value against the loonie, yen and yuan and just a 0.1% dip vis-a-vis the euro and Swiss franc.

Ten-year British gilt and German sovereign debt yields are down by five and three basis points, but the 10-year Japanese JGB is two bps higher.

Equities around the Pacific Rim have been well-bid, with gains today of 1.6% in India and Singapore, 1.0^ in Taiwan, 0.6% in China and 0.3% in Indonesia, Japan and South Korea. Stocks in Europe are up 0.3% in Spain, Italy and Germany and 0.1% in Switzerland and France. The British Ftse is off 0.3%.

Oil at $44.98 per barrel of WTI crude lies between where such trade yesterday and its close before the U.S. Labor Day weekend. Gold at $1,336.30 per ounce is showing resilience.

The Reserve Bank of Australia’s Official Cash Rate (OCR) had been cut by 25 basis points in May and August but was left unchanged as expected at 1.50% after the September Board meeting. Officials wish to see how growth and inflation react to monetary stimulus in the pipeline, which also includes two 25-bp rate cuts in 2015, two cuts of same size in 2013, a full percentage point of cuts in 2012 and two cuts in late 2011. Economic growth remains positive despite a big drop in investment. The labor market is improving, housing price inflation is not excessive, and general inflation is projected to remain quite low.

Same-store sales in the U.K. fell 0.9% on year in August, defying an expected positive percentage change. New British car registrations, a gauge of sales, accelerated to a 3.3% on-year advance in August.

South African GDP rose 3.3% at an annualized rate between 1Q and 2Q. GDP was 0.6% greater than a year earlier after a 1.0% on-year drop in the first quarter. The data far exceeded street expectations and buoyed the rand.

Revised national income accounts 2Q data released for the euro area showed the same changes in GDP as did the preliminary findings: a slower 0.3% rise from 1Q and on-year growth of 1.6%. Net exports accounted for 0.4 percentage points (ppts) of GDP growth, but inventories exerted a 0.2 ppt drag. Government spending and business investment each had zero effect on GDP growth, while personal consumption, whose quarterly growth slowed to 0.2%, only lifted GDP growth by 0.1 percentage point.

The unrevised Euroland growth rate masked a few changes in individual countries. Between 1Q and 2Q, Greek GDP rose 0.2%, down from 0.3% reported initially. Finnish growth was revised to zero from 0.3%. Austrian growth was bumped up to 0.1% from zero. And Spain’s increase was changed to 0.8% from 0.7%. Portuguese growth is now estimated to have been 0.3%, not zero.

The retail purchasing managers index for Euroland jumped 1.1 points in August to a 10-month high of 51.0. Improvement was led by France, whose retail PMI climbed 1.4 points to a 58-month high. Italy (up 2.9 points to a still-weak 43.2, a 3-month high) and Germany (up 2.1 points to a 5-month high of 53.1) also had higher retail PMI readings in August than July.

Germany’s construction purchasing managers index was unchanged in August at 51.6. That’s better than the July result of 50.4 but below readings of 52.7 in June and 59.6 last February.

German industrial orders in July edged up 0.2%, less than forecast, after dropping 0.3% in June. Orders for consumer goods overall (down 4.3%) and capital goods from domestic sources (off 5.6%) did particularly poorly. Orders in July were 0.7% lower than a year earlier and unchanged from their second-quarter average level.

Swiss GDP growth of 0.6% last quarter was twice as much as 0.3% the quarter before and lifted the on-year growth rate to 2.0% from 1.1%. The result was better than forecast and helped by a 1.7% quarterly rise in government spending.

Swiss consumer prices slipped 0.1% both on month and on year in August.

Romanian GDP growth of 1.5% last quarter matched the quarterly pace in 1Q and resulted in a 5.9% GDP rise from a year earlier. In Hungary, GDP grew 1.8% on year in 2Q in data adjusted for variation in the number of business days.

In the year to July, Czech industrial production plunged 14.1%, and construction contracted 16.3%. Hungarian industrial production fell 4.7% but just 0.1% adjusted for working days.

Australia’s current account deficit of A$ 15.535 billion in the second quarter was smaller than forecast, wider than the 1Q deficit of A$ 14.299 billion, and also less than the year-earlier deficit of A$ 20.506 billion.

New Zealand housing prices increased 14.6% in the year between August 2015 and August 2016.

The U.S. will be releasing the Fed’s labor market condition index, the IBD/TIPP optimism index, and the ISM non-manufacturing purchasing managers survey results later this morning.

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

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