Other Realities Like Soft Growth Intrude

September 23, 2016

Markets had by and large enjoyed a good week through Thursday, buoyed by the dovish decisions of the Fed and Bank of Japan. Compared to closing levels last Friday, 10-year sovereign debt yields are down eight basis points in the United States, 9 bps in Germany, and 16 bps in Great Britain. Stocks had rallied.

On Friday, investors awoke in a more sober mood. Euroland’s composite purchasing managers indes (PMI) fell to a 20-month low in September, a reminder that interest rates are low because of sluggish global growth and nil inflation. French GDP growth in the second quarter was revised to a dip of 0.1% from zero. The French composite PMI moved above Germany’s for the first time in over four years. Japan’s all-industry index in July, a monthly proxy of GDP, was 0.7% lower than a year earlier.

Another concern is the looming first debate on Monday between Donald Trump and Hillary Clinton. America’s allies are very worried about a possible Trump presidency and now realize that such is far from a remote likelihood.

The dollar advanced overnight by 0.8% against sterling, 0.7% relative to the Australian dollar and 0.6% versus the kiwi. The greenback otherwise is unchanged against China’s yuan and the Swiss franc, down 0.2% against the loonie and 0.1% softer versus the yen and euro.

Among commodities, West Texas Intermediate crude oil is unchanged at $46.30 per barrel, and Comex gold has settled back 0.2% to $1,341.50 per ounce.

Share prices fell 0.3% in Japan, China and New Zealand, 0.5% in Hong Kong, and 0.4% in India. Even larger drops have occurred so far in Europe of 0.9% in Italy, 1.5% in Spain, and 0.7% in Switzerland. The French, German and British stock markets are down 0.5%, 0.3% and 0.1% but Australia posted a 1.1% rise.

A preliminary estimate of Japan’s manufacturing PMI rose 0.8 points to an 8-month high, but its 50.3 level merely suggests stagnation.

As noted, Euroland’s preliminary composite PMI reading was at a 20-month low of 52.6. Third-quarter GDP likely rose 0.3% but lost momentum late in the quarter. The slowdown is concentrated in services, which fell 0.7 points to 52.1, a 21-month low. Manufacturing improved 0.3 points to a 3-month high reading of 52.6.

Germany’s composite purchasing managers index dropped 0.6 points to a 16-month low of 52.7, depressed by a 1.1-point slide in services to a 39-month low of 50.6. Manufacturing, in contrast, remained resilient in September with a PMI score of 54.3, a 3-month high.

France’s composite PMI of 53.3 was at a 15-month high and above its German counterpart. Services (54.1) and manufacturing (49.5) were at their highest respective levels in 15 months and six months. On-year French GDP in the second quarter was revised downward to 1.3%, however.

Dutch quarterly growth in 2Q of 0.6% was unrevised from its preliminary estimate. Such had also climbed 0.6% in the first quarter, more in a quarter than recorded in the second half of 2015. Dutch GDP was 1.8% greater than a year earlier.

Despite a 2.0% jump in construction, Japan’s all industry index went up just 0.3% on month in July, weighed down by a 0.4% drop in industrial production and just a 0.3% rise in service sector activity.

Singapore consumer prices fell less on year in August (0.3%) than their 0.7% July-to-July decline.

Spanish PPI deflation likewise slowed to an on-year slide of 3.1% in August from -4.6% in July.

Canadian retail sales and consumer price data will be released later today. Harker, Mester, and Lockhart of the Fed speak publicly today.

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


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