Three-Pronged Blow to European Confidence

May 23, 2018

Italy is poised to get a populist, anti-euro, anti-austerity, and pro-Russia governing coalition. Being the third largest economy to use the euro, this development poses an existential risk to the common European currency that is far greater than the debt problems of Greece.

  • Ten-year sovereign debt yields rose 10 basis points today in Italy in contrast to declines of 6 bps in Germany, 5 bps in The Netherlands and 5 bps in the United States.

Confidence in the Turkish lira has collapsed as that currency’s accelerating decline has evoked no response from the central bank there to stabilize market conditions. The lira dropped 4.0% today, over 9% this week, and more than 20% so far this year.

Preliminary purchasing manager survey results for May for Euroland, Germany, and France, although adversely affected by a bunching of holiday closures in the month, were nonetheless much weaker than anticipated and thus disappointing.

  • Euroland’s composite PMI sank a full point to an 18-month low of 54.1, as manufacturing and services hit respective 15- and 16-month lows of 55.5 and 53.9.  The data suggest that GDP is likely to growth at a slower 0.4% pace.
  • Germany’s composite PMI fell 1.5 points to a 20-month low. Service sector activity also printed at a 20-month low, and manufacturing recorded a 15-month low.
  • In France, manufacturing at a 3-month high of 55.1 offered a silver lining but was overwhelmed by a 16-month low in service sectors. Thus the French composite PMI fell 2.4 points to a 16-month low of 54.5.

Euroland consumer confidence remained soft in May, printing at a 2-month low of 0.2 versus 0.3 in April and a recent high of 1.4 in January.

The problems of Europe are dragging down global stock markets. In Europe, share prices thus far have fallen today by 1.7% in Germany and Italy, 1.5% in Spain, and 1.4% in Switzerland and France. British Prime Minister May has her own political woes, and the Ftse is down 0.6% today. Earlier in the Pacific Rim, stocks fell 1.7% in Hong Kong, 1.4% in China, 1.3% in Singapore, 1.2% in Japan, and 0.9% in New Zealand and India.

U.S. stocks have opened lower, too.

But the dollar strengthened overnight by 0.8% against sterling, 0.7% versus the euro, 0.6% relative to loonie and kiwi, 0.5% vis-a-vis the Australian dollar, and a whole lot more against several emerging market monies like the aforementioned Turkish lira and the Mexican peso (1.1%).

Relative to non-euro traditional safe haven currencies, however, the dollar has declined 0.9% against the yen and 0.1% versus the Swiss franc. Until recently, any theorizing that the dollar might lose its dominance in global finance evoked a patronizing dismissal. That’s now changing under Trump’s “America First” policy. The latest issue of The Economist warns that the enormous benefits to the United States bestowed by the dollar’s hegemony could be squandered if trust disappears in America’s commitment to a rules-based system.

The prices of metal commodities and WTI oil are lower today. Gold has firmed 0.1%.

Japan’s manufacturing purchasing managers index also fell in May, declining by 1.3 points to a 9-month low of 52.5.  Input prices rose at the fastest pace in 52 months, and orders grew at the slowest rate in 9 months.

British CPI inflation unexpectedly ticked down 0.1 percentage point (ppt) to 2.4% in April, and core CPI declined 0.2 ppts to 2.3%. Producer output and input price inflation printed in April at 2.7% and 5.3%, respectively. The government’s house price index stayed level in March at 4.2% but was down from 5.0% three months earlier. The CBI’s monthly survey of distributive trade activities reported a rebound to a 4-month high of +11 in May signifying positive growth following sub-zero readings in both March and April. Finally, Bank of England Governor Carney characterized the abrupt slowdown of British growth last quarter as temporary and reaffirmed that the central bank’s interest rate is likely rise at a gentle pace in the future.

Reserve Bank of Australia Governor Lowe noted that trade ties between China and Australia continue to deepen and expressed more sympathy for China’s defense of managing trade disputes on a multilateral basis rather than the bilateral approach pursued by the United States. A phone call that went bad between the just-inaugurated President Trump early in 2017 and the prime minister of Australia became of a bellwether of eroded U.S. ties with many of America’s long-time allies.

Consumer confidence rose to a 10-month high in Denmark this month but weakened to a 5-month low in turkey and a 3-month low in The Netherlands. Brazilian consumer sentiment dropped 2.8% in May, and Norwegian consumer confidence was 3.4% lower this quarter than in the first quarter.

Japanese department store sales recorded a stronger 0.7% on-year increase in April, but a smaller estimated preliminary 22% on-year increase in machine tool orders for April was confirmed by the finalized estimate. That’s down from a 48.8% increase between January 2017 and January 2018. Finally, Japan’s all industry index, a monthly supply-side estimate of GDP, was unchanged in March following a 1.1% monthly decline in January and a 0.4% rise in February.

On-year Mexican GDP growth in the first quarter was revised 0.1 percentage point upward to 1.3%, which nevertheless was the smallest increase since the fourth quarter of 2013. Between 1Q16 and 1Q17, real GDP had advanced 3.3%, by comparison.

U.S. new home sales, down 1.5% in April, reversed most of March’s 2.0% increase, but still exceeded their year-earlier level by 11.6%.

Minutes from the last FOMC meeting will be released at 18:00 GMT today.

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


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