Fresh Wave of Risk Aversion

October 26, 2018

Investors will get their first peak at U.S. third-quarter GDP in less than an hour. Growth likely decelerated from the 4.2% pace in the second quarter but still probably managed to be at 3.0% or a bit above.

But markets are reacting most keenly to the Federal Reserve officials’ disregard of President Trump’s criticism of their monetary policy. In comments over the past 24 hours, both Vice Chair Clarida and Cleveland Fed President Mester defended the need to keep raise interest rates, which remain under a neutral level.

The dollar and yen strengthened overnight. The yen rose 0.4% against the dollar, which has otherwise traded up 0.7% against the kiwi, 0.6% relative to the peso and Australian dollar, 0.5% vis-a-vis the Canadian dollar, and 0.2% versus the euro, Swiss franc and sterling.

Ten-year sovereign debt yields dropped five basis points in the U.K., Germany, and The Netherlands, 4 basis points in the United States, one basis point further in Japan, and 2 bps in Switzerland. Financial market volatility has seen intra-euro area spreads widen, as yields climbed six bps in Greece and 5 basis points in Italy.

Share prices dropped 1.8% in South Korea, 1.4% in Singapore, 1.0% in India, 1.3% in Hong Kong and 0.4% in Japan. European equities have thus far declined today by 2.1% in France, 1.7% in Germany, 1.6% in Italy, 1.3% in Britain, 1.2% in Spain, 0.8% in Switzerland, and 0.6% in Greece.

Among commodities, the price of WTI oil is down 1.4%, but that of gold firmed 0.5%.

Seasonally adjusted consumer prices in Tokyo rose only 0.1% on month in October. On-year core inflation remained at 1.0% in spite of a 1.4% monthly and 7.4% on-year rise in energy costs. Consumer prices in Tokyo excluding energy as well as perishable food recorded a lower on-year increase of 0.6% in October.

The European Central Bank’s latest survey of professional forecasters has lower growth projections of 2.0% for 2018 and 1.8% for 2019 followed by an unchanged 1.6% forecast for 2020. Projected CPI inflation in all three years remained at 1.7%, which is less than the estimated long-run trend of 1.9%.

The Bank of Russia’s one-week repo rate was left unchanged at 7.5% following a 25-basis point increase enacted in September. September’s tightening had begun to reverse five straight easing moves totaling 175 basis points made between September 2017 and March 2018. In a released statement, the central bank’s Board of Directors said inflation risks remain skewed to the upside especially in the short run. The baseline forecast sees CPI inflation peaking during the first half of next year, averaging 5-5.5% for 2019 as a whole but settling back to 4.0% in 2020. Growth is hovering around its potential.

German consumer confidence in November had an unchanged reading of 10.6. That’s the third such score in the last four reported months but down from 11.0 last February.

French consumer confidence posted a reading of 95 in October, which is between 94 in September and 96 in August yet down from a reading of 100 last April.

South Korean consumer sentiment dipped to a 2-month low of 99.5 in October from 101.7 in September and 105.5 last June.

French producer price inflation eased 0.2 percentage points to 3.5% in September.

Sweden’s SEK 1.4 billion trade surplus in September was SEK 1.0 billion smaller than a year earlier. There was a year-to-date deficit of EUR 23.4 billion, more than four times greater than the January-September 2017 deficit of SEK 5.1 billion. Import growth has persistently outpaced exports.

Swedish retail sales rose 0.5% on month in September but slid 0.2% in 3Q. The 2.1% September-over-September advance of retail sales volume was the most since May.

Danish retail sales grew 0.5% on month but just 0.7% on year in September.

Singapore’s jobless rate of 2.1% was 0.1 percentage point higher in August than July. That its highest level since May. Singaporean industrial production dropped 4.9% on month and 0.2% on year in September.

Still ahead: Aside from the aforementioned release of third quarter GDP, investors will also learn the latest Reuters/U. Michigan consumer confidence result. Colombia’s central bank is holding a monetary policy review today.

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

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