Theme of the Day: Slowing Global Growth

March 21, 2019

Since the Federal Reserve’s policy decision and press conference yesterday, there’s been a parade of other central bank policy meetings. Although only Norway changed its policy rate — a hike no less — the running theme in the many central bank statements is that the slowdown in global demand late last year is continuing and that a slew of uncertainties persist.

Investors appear unsure how to play this environment. U.S. share prices had fallen on Wednesday prior to the Fed announcement, then recouped the bulk of that ground by the end of Powell’s press conference, only to then go south again in the final partial hour of trading.

Two markets are closed today: Japan for the Vernal Equinox and India for the Maha Shivaratri holiday.

Equities rose 0.6% in Taiwan and 0.4% in China and South Korea but fell 0.9% in Hong Kong. The British Ftse has advanced 0.6%, but ahead of announcements out of a summit today of EU leaders, stocks are down 0.4% in Germany and Spain and 0.1% in France.

The dollar had weakened yesterday but today shows gains thus far of 0.7% against sterling, 0.4% relative to the euro,  and 0.3% versus the loonie and Swiss franc. On the other hand, the dollar is 0.2% softer versus the kiwi and 0.1% against the yen and Aussie dollar.

A bigger move today has occurred in 10-year sovereign debt yields, which are down 6 basis points in Australia, 7 bps in Italy, 8 bps in the U.K., 5 bps in Spain and France, 4 bps in Germany and 2 basis points in Treasury futures.

Gold has strengthened 1.1% to $1,315.70 per ounce. West Texas Intermediate oil, while 0.8% softer, is still very close to $60 at $59.80 per barrel.

British retail sales surprised on the upside, rising 0.4% overall in February and 4.0% from a year earlier. Core retail sales went up 0.2% on month and 3.8% on year.

Consumer confidence slipped further during March to more than a one-year low of minus 4 in the Netherlands. In contrast, consumer confidence recovered to a 4-month high in Turkey this month but, at 59.4, was well below last July’s reading of 72.7, and Danish consumer sentiment printed at a 2-month high of 3.8 versus 10.6 last June.

CPI inflation in Hong Kong decelerated 0.3 percentage points in February to a 9-month low of 2.1%.

Australian employment rose just 4.6K in February, well down from gains of 38.3K in January and 16.9K in December. Labor participation also dipped slightly, but so did the unemployment rate, which eased to 4.9%.

Spain’s EUR 4.48 billion trade deficit in January was 13.7% wider than in January 2018 due to a 1.8% year-on-year drop in exports.

With just one month remaining in the British government, the April-February public sector net borrowing deficit there of GBP 23.1 billion was 46% smaller than a year earlier. Outstanding fiscal debt as of end-February stood at 82.8% of British GDP.

The Bank of England as expected did not change its 0.75% Bank Rate, which earlier had been raised twice by 25 basis points, initially in November 2017 and then in August 2018 to 0.75%, highest since March 2009. Nor were quantitative policy tools modified, and both decisions were made unanimously as expected. In a released statement from the Monetary Policy Committee, officials speak of mixed data signals since their last meeting but assert that the findings expressed in their February Inflation Report remain essentially on track. Forward policy guidance in today’s statement asserts that

were the economy to develop broadly in line with those projections, an ongoing tightening of monetary policy over the forecast period, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2% target at a conventional horizon. The economic outlook will continue to depend significantly on the nature and timing of EU withdrawal, in particular: the new trading arrangements between the European Union and the United Kingdom; whether the transition to them is abrupt or smooth; and how households, businesses and financial markets respond.

Brazil’s Selic interest rate was maintained at 6.5% in a unanimous decision by policymakers at the Central Bank of Brazil. It’s been at that level for the past twelve months following a series of cuts totaling 775 basis points from October 2016. Slower global growth and a variety of uncertainties suggest inflation will converge on target, according to a released statement. The economy is recovering more slowly than expected, and inflation is projected to decelerate to 3.9% on average this year and 3.75% in 2021.

At the latest quarterly review of Swiss monetary policy, SNB officials kept policy unchanged. Since January 2015, when the automatic cap on Swiss franc was lifted and the interest rate target was cut by 50 basis points, the 3-month Libor rate target band has been an all-negative range of minus 1.25% to minus 0.25%, the sight deposit rate target has been at -0.75%, and officials have reserved the right to intervened subjectively when deemed necessary for preventing undue franc appreciation from an already overvalued level. A released statement today cuts projected annual inflation to 0.3% this year versus a prior forecast of 0.5%. Officials expect inflation to be at 0.6% next year, down from December’s forecast of 1.0%, and foresee only 1.2% inflation in 2021. In this lower path, inflation doesn’t cross above 1.0% until the spring of 2021 and is only reaches 1.5% by the end of that year, even if there is not rate increase in between now and then.

The Bank of Norway’s policy interest rate was lifted 25 basis points to 1.0%. Norway is an oil producer and exporter and benefits from the firmer trend lately in that commodity. Growth has been solid, according to a released statement.  Capacity usage is running a bit above normal, and core CPI inflation is somewhat higher than target. Global uncertainties warrant caution. The statement concludes, “”Our current assessment of the outlook and balance of risks suggests that the policy rate will most likely be increased further in the course of the next half-year.”

Bank Indonesia retained a 6.0% 7-day reverse repo rate and didn’t change the overnight lending or deposit rate, either. The repo rate has been at 6.0% since two percentage points of rate increases were engineered between May 2017 and November 2018. This tight stance seeks to reduce the current account deficit to 2.5% of GDP, keep Indonesia attracting capital inflows, and lower inflation to the middle of a 2.5-4.5% target range.

Monetary officials at Bangko Sentral ng Pilipinas maintained a 4.75% overnight reverse repo rate. It’s been at that level since 175 basis points of tightening from May to November of last year. In a released statement, officials say inflation is settling into the middle of the 2-4% target range and should hover around there both this year and next. Expected inflation also is stable and on target. The Philippines economy is growing, led by domestic demand.

In Taiwan, the Central Bank of the Republic of China had implemented cuts of 12.5% each in its discount rate at four consecutive quarterly reviews from September 2015 to June 2016. The rate since then has been 1.375% and will remain at that level. A released statement concludes, “Taiwan’s economy would likely grow at a somewhat slower pace this year against the backdrop of a downward revision of global GDP and trade growth forecasts and persistent uncertainties over the international economic, trade, and financial prospects. In addition, the actual output remains below potential and inflationary pressures are expected to be subdued. Moreover, Taiwan’s nominal and real interest rates continue to register around the middle range among a host of economies.”

In the U.S., the Philly Fed manufacturing index rebounded to a reading of +13.7 in March after slumping 21.1 points to minus 4.1 in February. New jobless insurance claims declined 9K last week to 221K, leaving its 4-week average little changed at 225K.

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

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