Central Banks Setting the Market Tone

September 22, 2016

Yesterday’s eagerly awaited Federal Reserve and Bank of Japan meetings have been followed today by monetary policy decisions in New Zealand, Norway, The Philippines, Indonesia and Turkey with South Africa and public comments from ECB President Draghi still to come. Overall, the tone from central banks has been dovish, creating incentives for funds to gravitate into those relatively high-yielding assets.

Share prices strengthened overnight in European and Asia. Sample gains thus far are 1.9% in Japan, 0.9% in India, 0.7% in Indonesia and South Korea, 2.0% in France and Spain, 1.9% in Germany and Italy, and 1.3% in Britain.

The dollar has softened by 0.6% against the Swiss franc, 0.5% versus the loonie, 0.4% relative to the Australian dollar and euro, and 0.2% vis-a-vis sterling. Emerging market currencies like the rand and won have risen, too. The Fed did not raise the federal funds target and released forecasts suggesting no more than two rate hikes are probable next year.

But the U.S. dollar has managed gains against the kiwi of 0.5% and yen of 0.3%. The Reserve Bank of New Zealand kept its Official Cash Rate at 2.0%, having cut such twice already this year on top of four reductions in 2015. A statement from the RBNZ protested the kiwi’s strength and suggested more interest rate cuts are likely. The yen had strengthened sharply yesterday after the Bank of Japan reconfigured its policy framework.

Ten-year German bund and British gilt yields have declined six basis points today, taking their lead from the lower Treasury yield yesterday following Janet Yellen’s press conference.

Commodities rebounded. WTI crude oil climbed another 1.0% to $45.79 per barrel, and Comex gold edged up 0.4% to $1,336.80 per ounce.

In the Philippines, the central bank kept monetary policy settings unchanged. The key reverse repo rate is at 3.0%. The overnight deposit and lending rates are at 2.5% and 3.5%. A narrower rate corridor had been introduced recently in June.

Officials at Bank Indonesia somewhat surprisingly cut the 7-day reverse repo rate by 25 basis points to 5.0%. Policy had also been eased in January, February, March and June of this year.

The Central Bank of Norway left its key policy rate at a lowly 0.5%, the level since a 25-basis point cut in March, and suggested no increase is likely for quite some time further.

Noting slower growth in the third quarter and predicting slower inflation, the Central Bank of Turkey cut the overnight marginal funding rate by 25 basis points to 8.25% and the late liquidity lending rate by a similar amount to 9.75% while holding the one-week repo rate unchanged at 7.5%.

Investors await the release of a bunch of U.S. economic indicators: the FHFA home price index, existing home sales, the index of leading economic indicators, the Kansas City Fed manufacturing index, the Chicago Fed National Activity Index, and weekly jobless insurance claims.  A preliminary estimate of consumer confidence in Euroland also arrives. Economic data released so far today from elsewhere have been few and not especially meaningful.

The CBI British industrial trends index stayed level in September at a reading of -5, same as in August which had followed minus 4 in July and -2 in June.

Consumer confidence in Turkey edged down 0.1 point to a reading of 74.3 in September.

Danish retail sales dipped 0.2% this month and were just 0.2% greater than in September 2015. Danish consumer sentiment printed at a 40-month low of 1.8 after a 4-month high in August of 4.8.

CPI inflation in Hong Kong jumped 2 percentage points to a 17-month high of 4.3% last month. The former British colony’s current account surplus of HKD 14.94 billion in the second quarter was down from HKD 16.2 billion in 1Q but much higher than its year-earlier HKD 0.1 billion level.

Irish producer price deflation narrowed to -0.9% in August from -1.3% in July. Icelandic wage cost inflation was at 11.2% in August.

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


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