Week Starts with Two Surprises

May 14, 2018

The governor of the Bank of France, who serves on the ECB Governing Council as well, indicated that not only is the European Central Bank likely to end its program of asset purchases later in 2018, but also that an initial interest rate hike will probably be engineered sometime next year rather than be delayed into 2020 or later.

The second surprise of the day comes from a Trump tweet, seemingly reversing a recently imposed seven-year ban by the Commerce Dept on the big Chinese telecom firm, ZTE, to acquire U.S. technology. The ban had threatened ZTE’s survival, and Trump’s request for the Commerce Dept to drop the measure could be a strategic offer of good faith on the eve of important trade talks between the U.S. and China. More likely, Trump learned that U.S. pressure on ZTE had started under the Obama administration, in which case reversing the ban merely conforms to the overriding Trump priority of scrapping every initiative under Obama’s stewardship from the record books.

The main impact on markets of these surprises has been upward pressure on long-term interest rates. Ten-year sovereign debt yields are up four basis points in Germany, three bps in the U.K. and one basis point in the United States. But the 10-year Japanese JGB yield is flat.

In foreign exchange trading, the dollar has fallen 0.5% against sterling, 4 bps versus the euro, three bps vis-a-vis the Swiss franc, two basis points relative to the loonie and peso, and one basis point against the Australian dollar. The greenback climbed 0.3% against the kiwi and 0.1% relative to the yen and yuan.

Asian equity markets performed fine today, but European share prices mostly fell. Stocks closed up 1.4% in Hong Kong, 0.9% in Taiwan, 0.5% in Japan and 0.3% in China and Australia. Share prices have fallen 0.6% in politically fragile Italy, 0.4% in Germany, and 0.3% in France, Spain and Britain.

Oil and gold prices slid marginally. Copper fell almost 1%.

Japanese domestic producer prices edged up just 0.1%, depressing their year-on-year increase to a 13-month low of 2.0%. However, 12-month increases in import prices (5.0%) and export prices of 2.2% represented the most in three and four months, respectively.

The on-year increase in Japanese machine tool orders in April of 22.0% represented the third straight deceleration after 12-month increases of 28.1% in March, 39.5% in February and 48.8% in January.

French business sentiment in manufacturing and services each fell a point according to the Bank of France’s monthly measure, but construction sentiment improved a point. And central bank of officials did not change their forecast that real GDP this quarter is likely to rise by 0.3%.

Finnish CPI inflation stayed steady at 0.8% in April. Greek import price inflation accelerated to 5.3% in March from 3.0% in February, and Hungarian industrial production recorded declines in March of 0.7% compared to February and 2.4% from a year earlier.

Ireland’s construction purchasing managers index climbed to a 3-month high of 60.7 in April, signaling robust expansion, from 57.5 the month before.

Turkey’s current account deficit last quarter of $16.39 billion was roughly twice as wide as the deficit in the first quarter of 2017. The deficit in March equaled $4.812 billion.

Cleveland Federal Reserve President Mester endorsed a continuing need for gradual central bank rate hikes, warned about excessive U.S. government debt, and suggested the Fed might need to eventually lift its rate above 3%.

Copyright 2018, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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