Short-Lived Fed Stockmarket Rally

January 31, 2019

The FOMC’s tightening pause gave a big boost to U.S. stocks yesterday and was augmented by some better-than-expected corporate earnings.  But the DOW fell in the first hour of U.S. trading, and share prices have also weakened today in Germany France, and Australia. This contrasts with gains close to 1% in China, Hong Kong and Japan.

Ten-year sovereign debt yields dropped today by three basis points in Germany, Britain, France, Switzerland, the Netherlands and so far Canada and the United States. The 10-year JGB remains unchanged at a yield of -0.01%.

The dollar has slipped 0.4% against the Canadian, Australian and New Zealand dollars, 0.3% versus the yen and 0.2% relative to the yuan, which has drifted higher as U.S.-China talks on trade have been taking place, but the buck today is unchanged against the euro and sterling.

Gold and oil prices are 1.0% higher so far on this final day of January, and being the last day of the month, there’s been a deluge of data releases.

U.S. jobless insurance claims shot up, partly reflecting the shutdown, by 53K to 253K last week, causing a 5K rise in the four-week moving average to 220.25K. The Chicago regional purchasing managers index dropped 7.1 points to a two-year low in January. More surprising, new home sales jumped 16.9% in November to an 8-month high but were still 7.7% lower than in November 2017.

The U.S. quarterly employee cost index rose 0.7% on quarter in October-December and accelerated to a year-on-year increase of 2.9% from 2.6% in the final quarter of 2017. The data attest to Fed Chairman Powell’s assertion yesterday that U.S. wage growth is moving higher, and central bank officials welcome this development.

Japanese industrial production slid by a smaller-than-forecast 0.1% in December and was 1.9% lower than a year earlier. Output climbed 1.0% in 2018, a third of its increase in 2017. Officials said the trend of industrial production is “picking up slowly,” which was the third such designation in a row. The year-on-year 4.6% rise in Japanese motor vehicle output last month was the most in 7 months. Housing starts recorded on-year growth of 2.1% in December after a 0.6% drop in November.

In the euro area, real GDP growth of 0.2% on quarter in 4Q matched the prior quarter’s performance, but year-on-year growth fell to 1.2% in 4Q and 1.8% in full-2018. The quarterly growth rate was a tad more than forecast, according to this flash report.

At the third and fourth largest economies in the euro area, GDP last quarter declined 0.2% in Italy after a 0.1% dip in 3Q and rose 0.7% in Spain following three consecutive increases of 0.6%. Compared to the final quarter of 2017, GDP was up 2.4% in Spain, the same on-year rise as in 3Q, and just 0.1% in Italy, down from 0.6% in 3Q and 1.6% in the final quarter of 2017.

The volume of German retail sales plunged 4.3% on month in December, that being the biggest decrease since May 2007, and were 2.1% lower than in December 2017. Sales rose just 1.2% in 2018, down from 2.3% in 2017, 2.5% in 2016, and 3.8% in 2015.

French CPI inflation declined a half percentage point to an 11-month low of 1.4% in December, while Spain’s preliminary CPI indication for December shows a 0.2 percentage point reduction to just 1.0%.

Euroland’s unemployment rate in December stayed at November’s 7.9% but was 0.7 percentage points below the end-2017 level. Italy’s jobless rate of 10.3% last month was the lowest since August. German unemployment likewise remained at a cyclical low of 5.0% despite a smaller 2K month-on-month decline in the number of unemployed workers.

British consumer confidence in January remained at December’s 65-month low. The British Nationwide house price index recorded only a 0.1% year-on-year increase this month, down from 0.5% in December, 3.2% in January of 2018 and 4.3% in January 2017.

South African producer prices dropped nearly 1% last month, depressing the 12-month rate increase by 1.5 percentage points to 5.2%.

Canadian PPI inflation slowed 0.6 percentage points to 2.2% last month and recorded a second straight monthly drop of more than 0.5%. But monthly Canadian GDP fell for the second time in three months during November and posted a 12-month increase of just 1.7%. Industrial production fell on month for the third time in four months.

An improved Australian terms of trade was attested by fourth quarter export and import price data. Export prices increased 4.4% on quarter and 15.7% on year, whereas import prices went up 0.5% compared to 3Q and 7.8% from a year earlier.

South Korean retail sales and industrial production grew between December 2017 and a year later by 3.0% and 1.6%, respectively.

On the central bank watching front,

  • A summary of last week’s Bank of Japan Board meeting voices concern about global growth prospects due to China’s slowdown, Sino-U.S. trade tensions, and softer factory output expansion  in Europe.
  • The Central Bank of Chile engineered a second 25-basis point in its monetary policy rate to 3.0%. The initial rate hike of similar size had been done in October. The rate’s last cyclical low of 2.5% had prevailed from May 2017 through October 2018. Chilean CPI inflation now of 2.6% is a half percentage point lower than when this mild tightening began. This second hike was decided unanimously by policymakers, who “considered that the evolution of macroeconomic conditions continues to warrant a gradual withdrawal of the monetary stimulus,” but they also intend to “proceed with this process gradually and cautiously.”
  • Even though CPI inflation  in Ukraine is at a 5-year low of 9.8%, the Board of the National Bank of Ukraine left its key interest rate at its recent cyclical high of 18.0%. The inflation target is centered on 5.0%, and the high interest rate is also intended to support the hryvnia. The spike of inflation, which prompted officials to raise its interest rate to 18% last September from 12.5% in April-October of 2017, is largely due to factors over which the central bank does not have direct control. “The NBU deliberately chose a more lengthy path to bringing inflation to the target in order to minimize the loss of economic growth. Being able to balance the need to drive inflation to the target, and the need to support economic growth, shows the flexibility of the inflation-targeting regime.”

Copyright 2019, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



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