Intensifying Concern that Euro Area Is Drifting Into a Fresh Debt Crisis over Italy

October 2, 2018

A quote from European Commission President Jean-Claude Junker set the tone for trading today: “I would not wish that, after having really been able to cope with the Greek crisis, we’ll end up in the same crisis in Italy.”

Ten-year sovereign debt yields, while dropping today by 3 basis points in France, Germany, The Netherlands, and Great Britain, shot up 7 basis points in Italy to 3.36%.

Share prices in Europe in today’s session so far have declined 1.0% in Spain, 0.9% in Greece, 0.8% in Germany and France, 0.7% in Switzerland, 0.5% in Italy and 0.4% in the U.K..

Share prices were also on their heels in the Pacific Rim, falling by 1.3% in South Korea, 2.5% in Hong Kong, 1.2% in Taiwan and Indonesia, and 0.8$ in Australia. Japan’s Nikkei, in contrast, edged up 0.1%.

The euro weakened 0.4% against the dollar, which also shows 0.4% gains against the kiwi and peso, 0.6% advances relative to the Australian dollar and sterling and a 0.1% uptick versus the loonie. The dollar is unchanged against the Swiss franc and 0.1% softer versus the yen. China remains closed all week.

Gold and oil have firmed 0.3% and 0.2%.

Japanese consumer confidence recovered marginally but at 43.4 last month was at its second weakest level of 2018. On-year growth in Japan’s monetary base continues to subside, slowing to 5.9% in September from 6.9% in August, 6.6% in the third quarter as a whole, 7.8% in the second quarter, 9.4% in 1Q, 17% in 2017 and 25.6% in 2016.

Producer prices in the euro area increased 0.3% on month and 4.2% on yer, reflecting a 12.0% 12-month increase in energy costs but just a 1.5% collective rise in all other components of the PPI.

A second Australian manufacturing purchasing managers index rose in September by 0.8 points to a 3-month high of 54.0. The AIG Australian PMI, reported yesterday, had jumped 2.3 points to a 6-month high of 59.0.

Britain’s construction PMI fell by 0.8 points to 52.1, a 6-month low. British house price inflation according to the Nationwide index was at 2.0% in September, marking the third such result in the last four reported months.

Czech GDP growth in the second quarter was revised upward to 0.7% compared to 1Q and to 2.4% versus a year earlier. The on-year pace slowed from 4.2% in 1Q and 5.5% in the final quarter of 2017.

Over the 12 months through August, South Korean industrial production advanced 2.5%, a 7-month high, and retail sales climbed by a 5-month high of 6.0%. Retail sales in Hong Kong rose 8.1% between August 2017 and August 2018.

In Thailand, CPI inflation settled back to 1.3% in September, with a sub-1% core rate of 0.8%. PPI inflation slowed in August to 1.3% as well.

Business sentiment in New Zealand continued to weaken last quarter according to the NZIER measure, printing then at -30% versus -20% in 2Q and +5% in the third quarter of 2017.

The Reserve Bank of Australia left its Official Cash Rate once again at 1.5% following this month’s review. The OCR was last changed in August 2016 when a 25-basis point decline was enacted. The RBA Board’s statement reflects no hurry to normalize policy soon: “The low level of interest rates is continuing to support the Australian economy. Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual.” The August 2016 rate cut culminated 150 basis points of easing since May 2013.

The Central Bank of Sri Lanka also announced no change in its key interest rates of 7.75% for deposits and 8.5% for loans. A statement from the bank’s Monetary Board makes the following points: tight monetary policy conditions are observed globally with a continuous strengthening of the US dollar; external sector recorded a mixed performance and the exchange rate depreciated at a faster pace; moderate growth in the domestic economy is expected to pick up; inflation to remain within 4-6 per cent target range despite recent transitory price pressures; and short-term market interest rates have responded to domestic market conditions, while
monetary expansion continued its gradual deceleration.

U.S. motor vehicle sales data and the New York regional PMI index known as NAPM will be reported later.

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

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