Dollar Rises as Powell Testimony Continues

July 18, 2018

The dollar is unchanged against the yen but extended its rise otherwise by gaining a further 0.6% against sterling, 0.3% versus the loonie, Aussie dollar and yuan, 0.2% relative to the euro and 0.1% vis-a-vis the Swiss franc and kiwi. The U.S. currency also strengthened overnight against a broad spectrum of emerging market currencies like those of Mexico, Turkey, Russia, Malaysia, India, Indonesia and The Philippines.

A key theme of Wednesday is the upbeat tone of Fed Chairman Powell’s testimony yesterday before the Senate Banking Committee, which is being reprised today before the House Financial Services Committee. Powell embraced the program of gradual increases in the federal funds target along with a reduction of the central bank’s balance sheet. The Fed Beige Book of regional business conditions, which gets released today, is expected to corroborate Powell’s positive spin on the U.S. economy.

Released evidence of lower-than expected inflation reinforced the contrast between what the Fed needs to do and the situations faced by other central banks.

  • Sterling got sold after U.K. price data were announced. British core CPI slipped 0.2 percentage points to 1.9% in June and recorded a zero month-on-month change. The 12-month increase of the government’s house price index dropped to 3.0% in May from 3.5% in April and 4.2% in March.
  • Core CPI inflation in the euro area also declined 0.2 percentage points in June to 0.9%. That pace was also below the preliminary indication, which had been 1.0%. Non-energy consumer price inflation of 1.3% was merely 0.1 percentage point above the mid-2017 level, and service sector consumer price inflation of 1.3% was 0.3 percentage points less than the level a year earlier.
  • Britain’s index of leading economic indicators was flat in May following a 0.1% dip in April, and Bank of England Governor Carney warned of adverse consequences if no Brexit deal is negotiated.

The U.S. Treasury late Tuesday released another strong report on U.S. capital flows. There were net inflows during May of $45.6 billion in long-term capital movements and $69.9 billion including short-term as well as long-term flows.

Commodity prices remain soft today. WTI crude oil dropped 1.1% to $67.36 per barrel, and Comex gold is down 0.2% at $1,224.60 per troy ounce.

U.S. share prices are little changed. Equities rose 0.4% in Japan and 0.7% in Australia but weakened 0.4% in India, China, and New Zealand. In Europe, stock markets have risen by 1.1% in Switzerland, 0.7% in Germany and the U.K., and 0.6% in France.

Among key 10-year sovereign debt yields, today’s most significant change is a 5-basis point drop in the British gilt.

Construction output in Euroland increased 0.3% on month in May and was 1.8% greater than a year earlier. Construction in the first quarter of 2018 had been 0.2% below the prior quarter’s level but 2.6% greater than in 1Q17.

The six-month annualized change in the Westpac index of Australian leading economic indicators slipped below its trendline for the first time since in nine months during June. More readings of this indicator are needed to confirm if the Australian business cycle may have crossed an inflection point. In the meantime, the central bank there shows no urgency to begin raising interest rates.

U.S. housing starts and building permits were weaker than anticipated last month. Starts plunged 12.3% on month to a 9-month low and were also 4.2% below their year-earlier level. Permits also touched a 9-month low, dropping 2.2% on month and 3.0% on year. U.S. mortgage applications fell 2.5% last week, and the National Association of Home Builders’ monthly U.S. housing market index stagnated at a reading of 68 in July. That index’s high point so far in 2018 came way back in January.

British producer output price inflation ticked up to 3.1% in June. Producer input price inflation also accelerated to 10.2%, but markets paid more attention to the aforementioned lower-than-forecast CPI results.

In other price news reported around the world today, CPI inflation in Malaysia slowed to 0.8% in June but rose to 4.6% that month in South Africa and to 1.7% in Cyprus and 2.0% in Austria. PPI inflation increased in June to 4.0% in Portugal and 3.7% in Poland.

Turkish retail sales fell 1.3% on month but climbed 4.6% on year in May. In South Africa, retail sales were 1.9% higher than a year earlier in May. Polish industrial production in June surpassed the year-earlier level by 6.8%.

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

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