Central Bankers Less Confident about What To Do

February 21, 2019

FOMC minutes from the late January policy review clarified that the Committee’s new buzz word “patience” reflects uncertainty as to what outlook the latest economic data and other factors may be implying. “In light of the range of uncertainties associated with global economic and financial developments, the Committee decided that it was not useful at this time to express a judgment about the balance of risks.”  In light of soft core and total inflation, prudence warrants doing nothing before the outlook becomes clearer.

Just-released minutes from the European Central Bank Governing Council, known euphemistically as the ECB Account, reflect greater concern that the common currency’s slowdown may prove more enduring than imagined before. Global protectionism is being watched carefully.

Bank Indonesia left its 7-day reverse repo rate of 6.0%, deposit rate of 5.25% and overnight lending rate of 6.75% unchanged at today’s policy review.  This was the third straight meeting to leave rates unchanged. The 7-day reverse repo rate had previously been increased by 1.5 percentage points from May through November of last year. Officials project 5-5.4% domestic demand-led growth and in-target inflation. They feel sufficient restraint is in the monetary pipeline to bring down the current account deficit-to-GDP ratio to a goal of 2.5%, while keeping domestic financial markets attractive to capital inflows in a world fraught with uncertainty.

The U.S. dollar overnight rose 0.8% and 0.3% against the Australian and New Zealand dollars, fell 0.3% against sterling and by 0.1% relative to the yen, euro and loonie, and remained unchanged on balance vis-a-vis the Swiss franc, yuan, and peso.

Ten-year sovereign debt yields climbed 3-4 basis points in the U.S., Germany, and U.K. but edged a basis point lower to negative 0.05% in Japan.

Gold gave back 0.7% of its recent price gain, while WTI oil held steadily somewhat above $57.0 per barrel.

The British Ftse is down 1.0%, while Australia’s stock market advanced 0.7%. Movements in other equity markets were comparatively muted overnight.

Preliminary purchasing manager surveys, which provide some of the best forward-looking economic information around the world, reinforce the view of slowing growth and inflation.

  • Japan’s manufacturing PMI dropped 1.8 index points to 48.5 in February, sinking below the 50 no change level for the first time in 32 months. Business sentiment hit its weakest level since late 2012.
  • The CBA Australia composite and service sector PMI readings in February of 49.7 and 49.3 were lower than “50” for the first time in this data series begun in May 2016. The manufacturing PMI fell 0.8 points to 53.1, indicating positive but slower factory growth.
  • Euroland’s composite PMI rebounded to a 3-year high of 51.4, which is still consistent with no more than 0.1% GDP growth. Services recovered 1.1 points to 52.3, but manufacturing printed below 50 for the first time since mid-2013 and was at a 68-month low of 49.2.
  • The French provisional composite PMI remained marginally below “50” at 49.9 but exceeded the December and January levels. This result implies a continuing below-trend economic performance for quite some time longer but at least indicates that the momentum of France’s contraction has stabilized at least temporarily. Much will depend on whether the yellow vest civil protests get resolved.
  • Germany’s composite PMI rose 0.6 points to a 4-month high of 52.7 but only because of strengthening service sector growth. The manufacturing PMI dropped 2.1 points further to a 74-month low of 47.6. The auto sector has been hammered by protectionism.

Japan’s all-industry index, a monthly proxy of GDP, ended 2018 with declines of 0.4% in November and 0.3% in December. Construction and service sector activity contracted in both of those months, and industrial production fell 2.1% in December, which more than reversed November’s 1.1% rise. Compared to December 2017, industrial production plunged 5.2%.

Japanese supermarket and department store sales each recorded greater year-on-year declines in January than in December, and machine tool orders in January were 18.8% below their year-earlier level in contrast to a 38.5% on-year increase in February 2018.

French sentiment among manufacturers remained at a 2-year low in February for a third straight month. But business sentiment in services, construction and retail each rose this month.

Australia unemployment stayed unchanged in January at 5.0%, the third time in four months at that level. 39.1K new jobs were created on net, more than twice analyst expectations.

Provisional estimate of January on-year CPI inflation were confirmed in Germany, France and Italy. German inflation of 1.4% was down from 1.6% in December and reflects an 11-month low. French inflation fell also to an 11-month low; such printed at 1.2% versus 1.6% in December and 2.2% in both September and October. Italian CPI inflation slid 0.2 percentage points to 0.9% in January. It was at 1.6% in November. Falling energy was the driving force behind disinflation in each of these economies.

A 1.2% rise in U.S. durable goods orders in December was smaller than forecast because of an unexpected further 0.7% slide in non-defense, non-aircraft orders. On a brighter note, new jobless insurance claims fell more than predicted to 216K last week from 239K in the prior week.

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

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