Rotation in Investment Strategies Extended

November 14, 2016

The dollar continued to climb, gaining overnight by 1.0% against the yen, 0.9% versus the Swiss franc, 0.8% relative to the euro, 0.7% vis-a-vis sterling, 0.5% against the kiwi, 0.3% versus the Mexican peso and 0.1% against the loonie. Since the close on November 8, the day of the U.S. election, the dollar has advanced 4.3% against the kiwi, 3.0% vis-a-vis the Aussie dollar, 2.5% relative to the yen, 2.2% against the euro, 1.9% against the Swiss franc, 0.8% vis-a-vis the Chinese yuan — but it has fallen 1.1% relative to sterling.

A broad cross-section of emerging market currencies continued to weaken. These economies are particularly exposed to a U.S.-led trade war.

Sovereign debt prices dropped further. 10-year yields, which rise as prices drop, are up today by 10 basis points in Britain, 7 bps in Germany, and 12 bps in U.S. Treasury futures. The rise in 10-year yields since last Tuesday amounts to 41 bps in U.S. Treasuries, 23 bps in British gilts, 20 bps in German bunds and six bps in Japanese JGBs.

The new market mantra predicts significant inflation is coming back to the United States, buoyed by a trade war, tariffs, a ballooning federal deficit, and all that high powered central bank money created previously but sitting in cash and just waiting for real demand to reawaken. Some analysts even fear stagflation, but the market reaction is not entirely consistent. Dollar strength, for instance, should depress import prices. In the early 1980s when a combination of tight U.S. monetary policy countered an explosion of the Federal deficit, the dollar doubled in value between 1980 and early 1985, but inflation plunged from double digits to around 4%.

Japan’s Nikkei advanced 1.7% overnight after a better-than-expected GDP report and has gained 4.5% since November 7. Elsewhere in the Pacific Rim, stocks climbed 1.0% in New Zealand and 0.5% in China but fell 2.5% in India, 2.2% in Indonesia, 1.3% in Hong Kong, 1.0% in Singapore and 0.5% in Australia and South Korea. In European trading, share prices have risen today so far by 0.3% in Germany, France and the U.K. but fallen 0.6% in Italy and 0.3% in Spain.

Another counter-indicator of coming U.S. inflation can be found in the price of oil, which sank another 1.5% to $42.78 per barrel of West Texas Intermediate crude and 16% in the last three weeks. Metals used in construction like copper continue to soar, but gold, which often trades inversely with the dollar, has lost 6% of value since November 4.

A powerful earthquake hit the South Island of New Zealand very near to the epicenter of the quake of February 2011. That quake evoked a fairly immediate 50-basis point drop in the Official Cash Rate to 2.5%. New Zealand’s OCR now stands at 1.75% following last week’s timely 25-basis point reduction.

Japanese real GDP growth last quarter exceeded expectations by a factor of two. GDP advanced 2.2% at an annualized rate compared to 2Q, but on-year growth was only 0.9%, down from 1.9% in the prior year to 3Q15 and 2.7% over the four quarters through the third quarter of 2014. Most of last quarter’s growth stemmed from net foreign demand. Exports climbed 8.1% on quarter annualized while imports fell 2.4%. Personal consumption, up 0.2%, remained disappointing, and so did non-residential investment (+0.1%). Public-sector spending was supportive. The GDP price deflator produced sub-zero changes both from the second quarter (-0.3%) and from the third quarter of 2016 (-0.1%).

Bank of Japan Governor Kuroda gave a speech urging larger wage increases in next spring’s annual round of settlements. He still foresees upward trends in growth and inflation but conceded that global economic uncertainties, a possible source of deflation, had increased recently. Prime Minister Abe and President-Elect Trump will be meeting in New York this Thursday.

Japanese industrial production during September was revised from no change reported initially to an increase of 0.6% on month and 1.5% on year. Capacity usage fell 2.0% on month and 1.0% on year.

Several Chinese economic indicators were reported.

  • Bank lending in October amounted to only 651 billion yuan, the lowest total since April and 47% less than in September.
  • But M2 money growth accelerated to 11.6%, most since June, from 11.5%.
  • Industrial production in October posted on-year growth of 6.1%, same as September’s result.
  • But on-year growth in retail sales slowed to a 4-month low of 10.0% from 10.7%.
  • Fixed asset investment during the first ten months of 2016 was 8.3% greater than a year earlier, down from a 10.0% increase in full-2015.

Industrial production in the euro area fell 0.8% on month in September. The 12-month increased dropped to 1.2% from 2.2% in the year to August. Production between 2Q and 3Q fell 0.4%, but September’s level was 0.5% greater than the 3Q average. Monthly declines during September in output amounted to 1.9% in Germany, 1.2% in Spain, 1.1% in France, 1.6% in Portugal and 0.8% in Italy.

Switzerland’s PPI/import price index edged up 0.1% in October, but the 12-month rate of decline doubled to 0.2%. Import prices were unchanged from a year earlier, but domestic producer prices fell on year by 0.3%.

Greek real GDP growth more than doubled to a quarterly 0.5% gain and was associated with on-year growth of 1.5% versus a contraction of 1.7% recorded between the third quarters of 2014 and 2015.

Italian CPI inflation slipped back under zero in October, printing at negative 0.2%. CPI inflation in Finland was low but positive at 0.5%.

The British Rightmove index showed greater on-year house price inflation of 5.8% in November following 4.2% in October and 4.0% in September. It was the highest on-year pace since May.

ECB President Draghi speaks publicly today. There are no meaningful U.S. data releases scheduled. In an interview on 60 Minutes Sunday night, President-Elect Trump said he would take only $1 of his annual salary and said he is still thinking of appointing a special prosecutor to look into allegations against Hillary Clinton.

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


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