Less Concern about Italy than Felt Yesterday

October 3, 2018

After Italy’s government had worried markets earlier by submitting a budget with a deficit of 2.4% of GDP, informed sources said that deficits would shrink after next year and settle back to 2.0% of GDP in 2021. A relief rally saw the 10-year sovereign Italian debt yield shed 13 basis points and Italy’s share prices rally 1.3%.

Three central banks reviews monetary policies today. All three left key interest rates steady.

  • The Central Bank of Iceland’s 7-day deposit rate was kept at 4.25%. Its last change, a cut of 50 basis points in August 2016, had partly trimmed 125 basis points of tightening in June through November 2015. A released statement┬ánoted that expected inflation still exceeds the central bank target and warned that “it has both the will and the tools necessary to keep inflation at target over the long term. If inflation expectations continue to rise and remain persistently at a level above the target, it will call for a tighter monetary stance.”
  • The National Bank of Poland’s reference interest rate was left unchanged at 1.5%, its level since a pair of 50-basis point cuts in the first quarter of 2015. Polish inflation has been moderate.
  • The National Bank of Romania likewise retained a 2.5% monetary policy rate, surprising some forecasts who had anticipated a 25-basis point increase.

The effects of sharp depreciation in the Turkish lira were reflected by greater than expected accelerations in Turkish inflation last month. Consumer prices jumped 6.3% on month, raising the 12-month rate of increase by almost 7 percentage points to 24.5%. Producer prices catapulted 10.9% on month in September, boosting on-year PPI inflation from 32.1% in August to 46.2%.

Loose talk by the top U.S. diplomat to NATO suggesting some willingness to launch a pre-emptive nuclear strike on Russia has further distressed the confidence of America’s friends and foes in the Trump Administration’s competence and temperament.

China’s market remained closed for the National Holiday. South Korea’s market also observed a holiday. Elsewhere in the Pacific Rim, share prices fell 1.5% in India, 0.5% in Taiwan, and 0.7% in Japan but climbed 0.8% in Singapore and 0.4% in New Zealand.

Germany is celebrating the 28th anniversary of its postwar reunification. In other European bourses, share prices are up 1.3% in Italy, 1.0% in Spain and Switzerland, 0.7% in France, 0.6% in the U.K. but down 2.2% in Greece.

10-year sovereign debt yields are up by 2 basis points in the U.S. and U.K. and 1 basis point in Japan.

The dollar appreciated overnight by 0.7% against the kiwi and Aussie dollar, 0.5% versus the Swiss franc, 0.2% vis-a-vis the yen, and 0.1% relative to the euro and loonie. Sterling firmed 0.1%. Gold and oil are barely changed.

Many more purchasing managers surveys were reported.

Euroland’s service-sector PMI rose 0.3 points to a 3-month high to 54.7, but the group’s composite purchasing managers index covering manufacturing as well services hit a 4-month low in September of 54.1. That’s still high enough to suggest that GDP likely expanded around 0.5% last quarter. The composite PMI readings of Spain, France and Germany sank to 58-, 21-, and 2-month lows, while Italy’s score rebounded to a 2-month low. Ireland’s composite PMI of 58.4 matched a 7-month high reached in August.

Japan’s service-sector PMI fell 1.3 points to a 2-year low of 50.2, suggesting near stagnation amid elevated inflation and weaker confidence in the future. Japan’s composite PMI was also below 51.0 at 50.7.

The British services PMI declined 0.4 points to a 2-month low of 53.9, resulting in an unchanged composite PMI of 54.1, same as August’s 2-month high.

The Australian Performance of Services index, compiled by AIG, skipped off August’s 8-month low of 52.2 to a 2-month high of 52.5.

Non-oil Middle Eastern PMIs revealed a 9-month low of 48.7 in Egypt, a 4-month low of 53.4 in Saudi Arabia, and a 2-month high of 55.3 in the United Arab Emirates. Lebanon’s private purchasing managers index was at a 3-month high but, being still well under the 50 breakeven level at 45.8, confirmed continuing sharp contraction.

The Russian service-sector and composite PMI readings of 54.7 and 53.5 in September each constituted the fastest improvement of operating conditions since April.

Sweden’s service-sector purchasing managers index fell 0.5 points to a 13-month low of 56.6.

Retail sales volume in the euro area fell for a second straight month in August, dipping 0.2% and resulting in a rise of just 1.8% from a year earlier.

Euroland posted a EUR 62.0 billion current account surplus in the second quarter, equal to 1.6% of GDP versus surpluses equal to 1.7% of GDP in the first quarter and 1.1% of GDP in the second quarter of 2017.

A 9.4% monthly plunge in Australian building permits in August was the sharpest drop since December 2017 and left permits 13.6% fewer than a year earlier.

September shop prices in Great Britain were only 0.2% greater than a year earlier according to the British Retail Consortium.

Spanish consumer confidence plunged 11.8 points to a 45-month low of 90.6 last month. Such had been at 107.0 in June and 103.2 a year ago.

U.S. motor vehicle sales totaled 17.44 million at an annual rate last month, 4.3% above August’s pace and above street expectations. ADP’s estimate of U.S. private jobs growth last month of 230K surpassed street expectations by 23%. Fed Chairman Powell called the combination of very low unemployment and low inflation remarkably positive and agreed maybe even too good to be true. The Fed will act authoritatively if inflation spikes.

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


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