Awaiting China’s Response on Tariffs and Watching Price Data

July 12, 2018

Today saw more hope than on Wednesday that officials in Beijing will take a step back rather than escalate the trade war with the United States following the latest tariff increases proposed by President Trump. Perceptions on this issue remain highly fluid, however, and could turn gloomier very quickly.

Share prices advanced 2.2% in China, 1.2% in Japan, 1.0% in Hong Kong, 0.8% in India, 0.9% in Australia and 0.6% in Taiwan. Stocks have risen 0.8% so far in France and the U.K. and by some 0.5-0.6% in the U.S. and German.

The dollar is mixed today. It advanced overnight by 0.5% relative to the yen, 0.4% against the Swiss franc and 0.1% vis-a-vis the euro but fell by 1.3% against the peso, 0.3% versus the Australian dollar, 0.2% vis-a-vis the loonie and yuan and 0.1% against sterling and the kiwi.

Ten-year German bund and British gilt yields edged a basis point lower even though the 10-year Treasury yield nudged up a basis point.

WTI oil rebounded 1.1%, and gold is 0.1% firmer.

The U.S., Germany, France, and Sweden released consumer price figures.

  • U.S. CPI inflation in June of 2.9% was the highest since February 2012, but the month-on-month rise of 0.1% constituted a 3-month low. Inflationary pressure was dominated by energy, which posted a 16-month high of 12.0%. Consumer food prices were 1.4% higher than a year earlier, and the core CPI index (excluding both food and energy was at 2.3%, which like the total index was the highest so far in 2018.
  • German consumer prices ticked up 0.1% on month and fell in on-year terms for the first time since February, dipping to 2.1% from 2.2%. While energy prices were 6.4% greater than in June 2017, the core index was only 1.4%, including only a 1.2% rise in service-sector prices.
  • French consumer price inflation held steady at 2.0%, as did Swedish inflation of 2.1%.

The gist of three central bank policy reviews was a tilt in the direction of less accommodation/more restraint.

  1. The National Bank of Ukraine hiked its key policy rate to 17.5% from 17%. This 50-basis point increase followed combined hikes of 250 basis points in the first quarter of 2018, 200 bps in the final quarter of 2017 and 50 bps in May of 2017. Like many emerging markets, Ukraine faces numerous inflation risks: dollar strength, higher prices of oil and other commodities, and above-target inflation that is pushing expected inflation higher. Ukraine needs continuing IMF aid, which is contingent upon the continuing implementation of structural reforms.
  2. Although the Bank of Korea kept its 7-day repo rate unchanged at 1.50%, there was a dissenting vote in favor of a second tightening. The first increase, a 25-basis point hike last November was preceded by a similar dissent at the October 2017 policy review. Fed tightening is encouraging capital outflows from emerging markets, so central banks like South Korea’s need to be cautious.
  3. Since bottoming at 1.1% in April, CPI inflation in Serbia has recovered to 2.3%, and officials at the National Bank of Serbia now believe that in-target inflation will be restored within the forecasting cycle. It looks increasingly like the considerable reduction of Serbia’s key central bank policy rate to 3.0% currently will be enough. The rate was reduced by 275 basis points during the last eight months of 2013, 500 bps in 2014-15, 50 bps in both 2016 and 2017, and a pair of 25-bp reductions this year in March and April.

New Zealand food prices rose 0.5% last month but just 0.2% from June of 2017.

Industrial production in the euro area advanced 1.3% in May, more than reversing a 0.8% drop in April, and thus lifting the 12-month rate of increase to 2.4% from 1.7%.

New U.S. jobless insurance claims unexpectedly fell anew to just 214K last week, and the four-week average was merely 223K.

Canadian home price inflation ebbed to 0.9% in May.

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

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