Market Calm on Wednesday Proved Short-Lived

June 21, 2018

The upbeat view regarding saber-rattling over trade never made much sense and in hindsight was just a rationalization by traders to explain calmer conditions yesterday. Trade war fear is back in the spotlight today. In the ensuing scramble for safety over investment return has seen

  • Share prices fall by 1.4% in Germany, 1.1% in France, 0.9% in Spain and the U.K., and 0.7% in the U.S..
  • The dollar slide 0.5% against sterling, 0.4% relative to the Swiss franc, 0.3% versus the loonie, 0.2% against the kiwi and 0.1% relative to the euro. The dollar rose 0.3% against the yuan, however.
  • 10-year sovereign debt yields dropped 4 basis points in Germany, 3 bps in the U.S. and 2 bps in Great Britain but soared 18 bps in Italy and 9 bps in Spain and Portugal.
  • Gold slipped 0.4%, and WTI oil edged 0.1% lower as the Saudi’s urged other producers to embrace a big production increase.

There have been a slew of central bank meetings to review monetary policies:

  • The Bank of England retained a 0.5% Base Rate, but the vote became further split at 6-3, as chief BOE economist Haldane joined the minority that favored a 25-basis point increase. The last rate change, a 25-basis point hike in November 2017, reversed a post-Brexit cut of 25 basis points enacted in August 2016. No change was made in quantitative settings.
  • The Swiss National Bank left its accommodative stance unchanged. The point interest rate is negative 0.75%, the level since a 50 bp cut in early 2015. At that time, a rigidly automatic franc ceiling against the euro was replaced by a policy of intervening on a discretionary basis when deemed necessary. At this week’s quarterly policy review, officials lifted the near-term projected path of CPI inflation a touch but lowered the path slightly from the third quarter of next year onward. Inflation is now not expected to cross above 2.0% until early 2021.
  • The Brazilian Selic interest rate had been slashed relentlessly from October 2016 through March 2018 by a total of 725 basis points (and to a record low of 6.50%), but as at the prior meeting in May, the policy committee known as Copom left the rate unchanged. A transportation sector shutdown has been associated with significant upward price pressure.
  • The Central Bank of the Republic of China (Taiwan) kept its discount rate at 1.375%, the level since the last of four straight 12.5-basis point reductions done in June 2016. Inflation of 1.66% remains very mild, and the monetary policies in major economies remain accommodative. But there are global economic and financial uncertainties to warrant caution.
  • The Filipino central bank raised its overnight repo rate by 25 basis points to 3.5% in a second tightening after a similar action last month. Expected inflation has been elevated, and the intent is to guard against second-order inflationary pressure.
  • The Bank of Norway maintained a 0.50% key policy interest rate. It’s been at that level since a 25-basis point cut in March 2016. Capacity usage is almost back to normal and likely to rise a bit faster than assumed previously. An initial rate hike is probable in September.

A member of the Bank of Japan Policy Board, Funo, expressed worry regarding U.S. protectionism and opined that Japanese inflation remains low and subject to downside risk.

New Zealand GDP grew 0.5% in the first quarter of 2018, the lowest quarterly advance since the final quarter of 2016. On-year growth of 2.7% was down from 2.9% in 4Q17 and the slowest pace since the second quarter of 2014.

sJapanese supermarket sales were 2.3% lower than a year earlier in May. In the same 12 months, machine tool orders recorded a 14.9% increase, matching the preliminary estimate.

South Korean PPI inflation accelerated to 2.2% in May from 1.6% in April.

The Swiss trade surplus narrowed to a 4-month low of CHF 2.255 billion in May, resulting in a January-May surplus of CHF 11.6 billion or 27.5% less than a year earlier.

Among released U.S. economic data reported today,

  • New jobless insurance claims fell 5K  to 216K last week, resulting in a four-week average of 221K, similar to the mean over the previous 16 weeks and extremely low by historical standards.
  • The Philly Fed manufacturing index sank 15.5 points to a reading in June of 19.9, its weakest reading since November 2016.
  • The FHFA house price index posted a year-on-year 6.4% in April, down from 6.9% in the first quarter and 6.8% in the final quarter of 2017.
  • The Conference Board’s index of leading economic indicators recorded only a 0.2% rose in May, half April’s increase and considerably less than the average monthly climb of 0.7% in the three months through February.

Consumer confidence in the euro area moved below the zero level in June for the first time since last October and printed at -0.5.

Consumer sentiment, by contrast, improved during June in both Denmark and Turkey and remained unchanged in The Netherlands.

The 229 million rand South African current account deficit in the first quarter of 2018 was its largest since 2Q14.

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



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