A Fresh Wave of Risk Aversion
March 22, 2019
There’s been a big move into safe assets, reflecting three developments since Wednesday:
- The Fed’s decision was more dovish than expected, putting interest rate normalization on hold for all of 2019 and ending the balance sheet rundown after September.
- EU leaders put Britain on a short leash to decide on its Brexit plan. While March 29 will pass with the U.K. still a member, the U.K. government has until May 22 at the latest to take a definitive stand. And if parliament doesn’t accept PM May’s Brexit deal by April 12 or indefinitely suspend Article 50, Britain must leave with no plan in place.
- Preliminary euro area purchasing manager survey results for March took a new turn for the worse. The manufacturing contraction has deepened.
The dollar rose 0.8% against the peso, 0.6% versus the euro, 0.3% vis-a-vis the Australian dollar, 0.2% relative to the yuan and Swiss franc, and 0.1% against the loonie and kiwi. The dollar fell 0.4% versus the yen and 0.3% against sterling overnight.
Ten-year sovereign debt yields are five basis points below Thursday closing levels in the United States, Germany, and France. The 10-year Japanese JGB and British gilt yields slid by 3 and 2 basis points. Compared to only a week ago, the 10-year bund dropped 9 basis points to minus 0.01%, the 10-year Treasury yield lost 10 bps to 2.49%, and the British gilt yield tumbled 17 bps to 1.04%.
European stock markets have traded down so far today by 1.1% in Italy and the U.K., 1.0% in France, 0.9% in Spain, 0.6% in Switzerland and 0.5% in Germany. Equity markets in Asia were relatively calm.
Comex gold climbed a further 0.4% $1,319.10 per ounce, which is close to a one-month high. West Texas Intermediate crude oil fell back 0.7%.
Euroland’s composite purchasing managers index printed at a 2-month low of 51.3, its third lowest score since November 2014. Manufacturing tumbled to a 71-month low reading of 47.6, suggesting that that component of GDP likely fell 0.5% this quarter, but GDP as a whole probably showed positive growth of 0.1-0.2%.
Export-dependent Germany has become a mounting drag on the whole Euroland economy. The German composite PMI slid 1.3 points from a 4-month high in February to a 69-month low of 51.5 in March. The German manufacturing PMI dropped by 2.9 points to a very weak 79-month low of 44.7.
In France, both manufacturing (49.8) and services (48.7) printed below the 50 level that separates improvement from outright deteriorating conditions. The composite French PMI was at a 2-month low of 48.7.
Japan’s manufacturing PMI score of 48.9 matched February’s 32-month low. Business optimism was below the long-term mean score in March.
The CBA Australian manufacturing PMI fell 0.9 points to 52.0, but services rose 1.1 points to 49.8.
Japanese core CPI inflation, which excludes perishable food but not energy, edged 0.1 percentage point lower to 0.7% in February. The 12-month increases in overall consumer prices and the CPI excluding both fresh food and energy stayed unchanged at 0.2% and 0.4%, still very far from the Bank of Japan target of 2.0%.
Japan’s index of leading economic indicators in January was revised downward to a 28-month low. The index of coincident economic indicators printed at a 32-month low and prompted officials to warn that such is signaling a possible turning point. Japanese department store sales were only 0.4% higher than a year earlier in February.
Euroland’s unadjusted current account surplus of EUR 9.3 billion in January marked a 3-year low, but the seasonally adjusted current account surplus of EUR 36.8 billion was EUR 20.6 billion wider than December’s surplus. As a percent of GDP, the surplus over the past 12 months equaled 3.0%, down from 3.4% over the prior 12-month period.
The Central Bank of the Russian Federation maintained a one-week repo rate of 7.75% after its latest monetary policy review. The key interest rate was increased a quarter of a percentage point twice last year in September and then in December, but a statement released today revised projected inflation this year downward by 0.3 percentage points to a range of 4.7-5.2% The statement then suggests that the next rate change is likely to be downward in direction.
Should the situation unfold according to our baseline forecast, we hold open the prospect of a key rate reduction somewhat sooner than we assumed back in December last year. We do not rule out that this may occur in 2019. The Bank of Russia will make its key rate decisions, as it always does, taking into account inflation and economic dynamics against the forecast as well as risks posed by external conditions and the reaction of financial markets.
Malaysian CPI inflation, which had turned negative in January, printed at minus 0.4% in the 12-months through February.
Hong Kong posted a current account surplus of HKD 42.08 billion last quarter, down from HKD 48.01 billion in the third quarter of 2018 but above HKD 21.66 billion in the final quarter of 2017.
Italy’s EUR 3 million unadjusted but tiny current account surplus in January was much improved from a deficit of EUR 936 million a year earlier.
Canadian CPI inflation results last month (1.5% overall and 2.0% core) were consistent with what the Bank of Canada has been assuming. But January retail sales in Canada were on the soft side, posting a second straight month-on-month 0.3% drop and decelerating to a 1.1% year-on-year increase.
Still ahead: U.S. existing home sales and monthly federal budget.
Copyright 2019, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Brexit, Canadian CPI and retail sales, euro area current account, Euroland PMI