Focus Turns to Central Banks

October 25, 2018

The dollar this Thursday is narrowly mixed with upticks of 0.2% against the yen and Swiss franc and of 0.1% versus the loonie but downticks of 0.3% vis-a-vis the Aussie dollar and peso, 0.1% relative to sterling, the euro, and kiwi. The yuan is steady.

Japan’s Nikkei plunged 822 points or 3.7%. Share prices also lost 2.8% in Australia, 2.4% in Taiwan, 1.6% in South Korea, 0.7% in Hong Kong, and 0.6% in Singapore. But European bourses have seen a dead-cat bounce of 1.7% in Spain and Italy, 1.4% in France, and 0.8% in Greece. The German Dax and British Ftse are up 0.4% and 0.2%.

Ten-year German bunds and British gilts are steady, but yields have dropped 9 basis points in Italy, 8 bps in Greece, 6 bps in Portugal, 5 bps in Spain and Australia, and 2 bps in Japan.

Gold and oil firmed modestly.

The European Central Bank left policy unchanged. The central bank’s interest rates including a negative 0.40% deposit rate are unlikely to rise through the summer of 2019. This will be the last quarter of the asset purchase program at the reduced pace of EUR 15 billion per month, but even afterward, maturing principal under the APP will be reinvested. ECB  President Draghi will hold a press conference shortly.

In Turkey, where the one-week repo rate was lifted 625 basis points last month to 24.0%, the Monetary Policy Committee of the Central Reserve Bank paused its tightening. But a released statement warns that more restraint may become necessary: “Tight stance in monetary policy will be maintained decisively until inflation outlook displays a significant improvement. Inflation expectations, pricing behavior, lagged impact of recent monetary policy decisions, contribution of fiscal policy to rebalancing process, and other factors affecting inflation will be closely monitored and, if needed, further monetary tightening will be delivered.” Price risks still lie to the upside as a result of the lagged effect of lira depreciation.

Officials at the National Bank of Ukraine likewise did not hike the key interest rate further. It’s now at 18.0% following a 50-basis point increase in September and a total of 550 basis points of increase during the past 12 months. Like their Turkish counterpart, officials in a statement warned about the possibility of more rate increases. “Taking into account an updated macroeconomic forecast and the assessments of the above risks, the NBU Board believes that existing monetary conditions are tight enough to reduce inflation in the mid-term... However, the NBU will continue to keep a close watch on factors of underlying inflationary pressures, in particular on consumer demand, inflation expectations and any progress achieved in ensuring cooperation with international official lenders. If inflation pressures do not ease or build up, the central bank could raise the key policy rate again.” Projected CPI inflation this year was revised to 10.1% from 8.9%.

The Bank of Norway’s key interest rate was left at 0.75%. A 25-basis point increase last month was the first hike since May 2011. From December 2011 through March 2016, five cuts totaling 150 basis points had been enacted. The next rate hike is most likely to occur during the first quarter of 2019 according to a released statement that goes on to assert “The outlook and balance of risks imply a gradual increase in the key policy rate. Economic growth has been a little lower and inflation somewhat higher than projected, but the outlook and the balance of risks do not appear to have changed substantially since the September Report.”

Yesterday’s Fed Beige Book speaks of steady U.S. growth, modest to moderate wage and price inflation, and intensifying trade concerns but contains nothing likely to interrupt plans for more interest rate hikes.

South Korean GDP grew more slowly last quarter (0.6% versus 2Q) than expected, dampening the year-on-year pace to a 9-year low of 2.0%.

Japanese corporate service prices ticked up 0.1% last month, completing a half year in which such only rose 0.4% altogether. The 12-month rise of the CSP slipped to 1.2%.

New Zealand recorded a record NZD 1.56 billion monthly trade deficit last month, 34% wider than that in September 2017.

Hong Kong’s year-to-September trade deficit equaled HKD 422 billion. The September deficit of HKD 47.7 billion compares to HKD 44.7 billion a year earlier.

The IFO Business Climate Index for Germany fell 0.9 points in October to a 3-month low of 102.8, with both current conditions and future expectations also touching 3-month lows despite another record high in the construction sector. IFO officials blamed “growing global uncertainty” for the weakening trend.

In Sweden, consumer confidence dropped to a 4-month low in October of 99.5 from 103.5 in September. Producer price inflation of 10.1% in September was the most since July 1995 and up from 2.5% last January.

New unemployment levels were reported of 14.55% last quarter in Spain (versus 16.4% a year earlier), 4.0% in Norway in August (same as July), and 1.7% in Iceland (a 4-month low).

South African PPI inflation edged up another 0.1 percentage point in September to a 16-month high of 5.2%.

U.S. durable goods orders had been expected to drop in September following an outsized 4.6% leap in August but instead rose another 0.8%. The year-to-date total of orders was 8.9% greater than in January-September of 2017. 215K new U.S. jobless insurance claims last week matched expectations. But the advance indication of the U.S. trade deficit for September ($76.0 billion) again surpassed analyst forecasts.

Another suspicious package has been sent to a Trump administration critic, this time Robert DeNiro.

Still ahead: U.S. pending home sales and the Kansas City Fed manufacturing index.

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

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