Trade War Fear Takes Center Stage
March 22, 2018
While Fed Chairman Jay Powell downplayed the risk to growth from trade restraints at least insofar as any influence on U.S. monetary policy is concerned, global financial markets are taking the danger of a trade war very seriously, particularly as President Trump seems poised to slap $50 billion of tariffs on imported Chinese goods. There’s been a stampede from stocks into fixed income securities.
- Ten-year British gilt yields dropped 7 basis points, and its U.S. counterparts are each six basis points lower today.
- The DOW opened with a plunge of more than 300 points, equivalent to 1.3%.
- Equities in Asia closed down 1.1% in Hong Kong, 0.9% in Indonesia, 0.6% in Singapore, 0.5% in China and 0.4% in India.
- Stocks so far in Europe are have today fallen by 1.8% in Italy, 1.7% in France, 1.6% in Germany, 1.4% in Spain, 1.3% in the U.K., and 1.2% in Switzerland.
- The yen once again has been the strongest major currency overnight, gaining 0.5% against the dollar.
- The dollar otherwise also shows a dip of 0.1% versus the Swiss franc and no change relative to the loonie, but it has risen by 0.3% against the euro, 0.7% vis-a-vis the Australian dollar, 0.2% versus the yuan and sterling, and 0.4% against the peso.
- West Texas Intermediate oil fell 0.8% to $64.67 per barrel.
- Comex gold, on the other hand, has firmed 0.7% to $1,336.4 per ounce.
Preliminary purchasing manager March surveys for Euroland, Germany and France show a “quite dramatic loss of momentum,” partly as a result of bad weather and natural “growing pains” after very strong economic expansion, but also reflecting the appreciation of the euro and trade war fear.
- Euroland’s composite PMI sank 1.8 points to a 14-month low. The separate indices for manufacturing and services dropped more than expected to 8- and 5-month lows, respectively.
- Germany’s composite PMI dropped to an 8-month low in March of 55.4.
- France’s composite PMI of 56.2, down from 60.3 back in November, was at a 7-month low.
Japan’s preliminary manufacturing purchasing managers index lost 0.9 points to a 5-month low of 53.2.
In other Japanese data released overnight, the all-industry index, a monthly proxy of GDP, slumped 1.8% in January but a 1.8% on-year increase was similar to the fourth quarter-over-fourth quarter advance. Japanese department store sales posted a third consecutive 12-month decline in February, this time of 0.9%.
The IFO-compiled German business climate index sent another disturbing signal to investors, leading IFO officials to conclude that the “threat of protectionism is dampening the mood in Germany.” Overall business climate dropped to an 11-month low in March of 114.7. Business expectations touched a 13-month low, and current conditions slid to a 3-month trough. By sector, manufacturing and retail activity fell to 11- and 7-month lows, and wholesale activity matched the 4-month low reading of February. Only construction improved, hitting a 3-month high.
The business climate in France dropped by a point for a third consecutive month in March. Manufacturing and retail were at a 4-month lows, and services matched the reading in February, which had been lower than the scores in the prior three months.
Euroland’s seasonally adjusted current account surplus widened to a 4-month high of EUR 37.6 billion in January despite a smaller merchandise trade surplus. The current account surplus over the latest twelve reported months equaled 3.6% of GDP, up from 3.3% in the previous twelve months through January 2017.
South African retail sales slumped 1.6% on month in January, cutting the on-year increase almost in half to 2.9%.
Australian labor statistics were mixed. The jobless rate in February rose 0.1 percentage point to 5.6%, and overall jobs growth of 17.5K was constrained by a 47.4K decline in part-time workers. The participation rate ticked up 0.1 percentage point, returning to December’s 65.7% recent high.
Thursday has been an active day on the central bank watching front.
The Bank of England kept a Bank Rate of 0.5%, but the emergence of two dissenting votes on the 9-person Monetary Policy Committee underscored the message that a gradual tightening is coming soon and deemed necessary to return inflation in a sustainable way to the 2.0% target. There thus far has been just a single 25-basis point hike in this cycle, which occurred last November. The two dissenters, McCafferty and Saunders, had previously cast dissenting votes three times each prior to the November rate increase.
Late Wednesday came news that the Central Bank of Brazil’s Selic rate was being cut another 25 basis points to 6.50%. See my review.
The Reserve Bank of New Zealand’s Official Cash Rate was left unchanged at 1.75%, its level since a 25-basis point cut in November 2016. A released statement said it is likely that policy will remain accommodative “for a considerable period.”
The Filipino overnight reverse repo rate, which has been at 3.0% since June 2016, was not changed either, but officials at Bangko Sentral ng Pilipinas observed that inflation risks are skewed to the upside and that expected inflation is starting to rise.
At the Central Bank of the Republic of China (Taiwan), whose policy interest rate has been at 1.375% since June 2016, did not change such at its latest quarterly policy review.
Bank Indonesia’s seven-day reverse repo rate was last cut in September 2017. This month’s review left the rate at 4.25%. Inflation currently is in target.
Released U.S. data today showed a 3K increase of new jobless insurance claims last week to a still extraordinarily low 229K; a 0.8% monthly rise in the FHFA house price index in January, twice December’s increase and lifting on-year house price inflation to 7.3%; another solid 0.6% increase in the Conference Board’s U.S. index of leading economic indicators for February; and mixed results in the IHS U.S. PMI results (manufacturing grew faster in March, but service sector growth slowed).
Still to come: the Kansas City Fed regional manufacturing index.
Copyright 2018, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Bank of England, Euroland current account, French and German business climate, Japanese all-industry index, purchasing manager indices