ECB Policy Shift Drives Stocks and Sovereign Debt Yields Lower, Dollar and Yen Higher

March 7, 2019

The Governing Council of the European Central Bank revised projected growth and inflation significantly downward, postponed the first possible interest rate hike to beyond 2019, announced a third round of quarterly targeted longer-term TLTROs to help “preserve favorable bank lending conditions and the smooth transmission of monetary policy,” retained a negative risk balance in spite of today’s announced stimulus, but also maintained a baseline projection that sees inflation eventually converging upon the target of below but close to 2.0%, contingent upon maintaining an ample degree of monetary stimulus for as long as is deemed necessary.

The ECB now projects GDP growth of 1.1% this year followed by 1.6% in 2020 and 1.5% in 2016 as well as CPI inflation of 1.2% in 2019, 1.5% in 2020 and 1.6% in 2021. At the same time, an OECD Interim Economic Outlook published today that foresees GDP expanding in the euro area by 1.0% in 2019 and then 1.2% next year. The OECD also projects growth this year of 2.6% in the U.S., 1.5% in Canada, and 0.8% in both the U.K. and Japan, followed in 2020 by 2.2% in the U.S., 2.0% in Canada, 0.9% in Britain and 0.7% in Japan.

Share prices have thus far have declined today by 0.9% in the U.S., 1.3% in Hong Kong, 1.0% in Italy, 0.9% in Germany, 0.8% in Switzerland, and 0.7% in Canada and Japan, and 0.6% in Great Britain.

The dollar has advanced 0.7% against the euro, 0.6% relative to sterling, 0.5% vis-a-vis the loonie and peso, and 0.3% against the Swiss franc, while easing 0.2% versus the yen and 0.1% relative to the kiwi and Aussie dollar.

Today’s drop in 10-year sovereign debt yields has been substantial: 5 basis points in the case of Germany, Switzerland, France and Great Britain, 4 basis points in the U.S., 6 bps in Spain and 7 bps in Italy.

WTI oil firmed 0.4% overnight, while Comex gold softened 0.2%.

There was also a monetary policy review today in Serbia and Peru. The National Bank of Serbia kept its key policy rate unchanged at 3.0%, its level since a pair of 25-basis point cuts in March and April of 2018. The bank’s executive board projects low, stable and in-target inflation but says caution is advised because of the persistence of protectionism, geopolitical tensions, commodity and financial market uncertainties, and the possible normalization of some central bank monetary policies. Peru’s policy decisions have not been announced yet.

The recently improved U.S. non-farm productivity growth continued last quarter when such rose 1.9% at an annualized pace from 3Q and by 1.8% from the final quarter of 2017. Productivity growth averaged 1.3% in 2018 after 1.1% in 2017 and 0.2% in 2016. The on-year rise in unit labor costs accelerated to 2.0% last quarter from 1.6% in 3Q but slowed to 1.4% in 2018 from 2.2% in 2017. U.S. non-farm jobless insurance claims last week totaled 223K, similar to the prior week and to analyst forecasts.

Euroland real GDP grew just 0.2% last quarter, unrevised from an earlier advance estimate. On-year growth of 1.1% was down from 1.6% in the third quarter and 2.7% in the final quarter of 2017. Real GDP contracted 0.1% on quarter in both Greece and Italy and held flat in Germany after a 0.2% slide in 3Q. Calendar year average Euroland growth of 1.8% in 2018 was down from 2.4% in 2017.

Jobs in the euro area climbed 0.3% last quarter, but the year-on-year increase slowed to 1.3% from 1.4% in 3Q and 1.6% in the final quarter of 2017.

Italian retail sales in January posted on-year growth in January of 1.3%. Dutch and Cypriot consumer prices in February were 2.6% and 1.25% higher than a year earlier.

Japanese international reserves increased by $12.5 billion in February and $29 billion over the past four months to $1.282 trillion. Chinese foreign exchange reserves increased $2.26 billion in February to $3.09 trillion.

Australian retail sales only rebounded 0.1% in January from a 0.4% drop in December, and the 12-month 2.8% rate of increase was down from 3.2% in December and 3.5% in October. In a separate report, a record high Australian trade surplus of A$ 4.549 billion was experienced in January. Finally, the Aussie construction purchasing managers index improved 0.7 index points to a 3-month high in February but, at 43.8, remained below the 50 level that separates expansion from contraction remained in contractionary territory for a sixth straight month.

Japan’s index of leading economic indicators sank 1.3 points to a 32-month low of 95.9 in January, and the trend designation of the index of coincident economic indicators, which tumbled 2.7 points to 97.9, was changed from “weakening” to “signaling a possible turning point.”

South Africa’s current account deficit narrowed 39% last quarter and to 2.2% of GDP from 3.7% of GDP in the third quarter.

Brazil service-sector and composite purchasing manager indices rose modestly to one-year highs in February of 52.2 and 52.6.

Mexican CPI and PPI inflation receded in February to 3.9% and 4.5%, respectively.

After jumping 6.4% in December, Canadian building permits fell back 5.5% in January.

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

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