Brexit Mess and Central Bank News

May 22, 2019

The latest Brexit proposal from British Prime Minister May was defeated heavily by a parliamentary vote of 432-202. That was a significantly bigger defeat than on her previous attempt.

Sterling dropped to a four-month low of $1.2641. The ten-year British gilt yield slid six basis points to 1.02%, but the Ftse-100 avoided the slide experienced in continental European stock markets where today’s losses so far amount to 0.8% in Italy, 0.6% in France and Germany, and 0.5% in Switzerland and Spain.

Asian share prices fell 0.5% in China but rose 0.4% in India (where PM Modi appears to have won reelection) and 0.1% in Japan.

Ten-year U.S. Treasury and German bund yields fell two basis points each.

In contrast to the dollar’s 0.3% net rise against sterling, the U.S. currency slipped 0.4% against the Swiss franc, 0.3% versus the loonie, 0.2% vis-a-vis the yen and 0.1% relative to the euro and peso. The yuan and Australian and New Zealand dollars are trading unchanged from Tuesday closing levels.

WTI oil dropped 1.3% overnight. Comex gold firmed 0.3%.

Several Fed officials made public remarks over the past two days, the gist of which is that a future rate cut is possible but only if inflation fails to rise as forecast and in any case not during the very short run. The buzzword of forward guidance is patience. Boston Fed President Rosengren cited trade tensions as a downside risk, and Treasury Secretary Mnuchin said there are no imminent plans for him to visit Beijing.

FOMC minutes from the last policy review will be published later today.

In the meantime, the Central Bank of Iceland unexpectedly cut its seven-day term deposit rate to 4.0% from 4.5%. This reduction constitutes a double-reversal of trend. Following cuts totaling 125 basis points from May 2017 to October 2017, the central bank rate had been raised by 25 basis points just six months ago amid robust domestic growth. Today’s statement of explanation for the easing so suddenly after an initial rate increase revises projected economic growth in 2019 to a contraction of 0.4% from a forecast made three months ago of positive 1.8% growth. As a result of this big revision, officials have scrapped the view of a widening positive output gap and now envisage a situation emerging of excess aggregate supply. The statement predicts inflation peaking soon at about 3.4% and then easing into target next year, and the observation is made that inflation expectations are already moderating.

Bank of Japan Board member Harada believes that Japanese monetary policy may need to be eased further if the economy weakens. He’s worried that a planned consumption tax hike in October will unduly depress aggregate demand at a time when the economy may still be fragile.

Japan’s customs trade figures for April were disappointing. The surplus collapsed to JPY 60 billion from JPY 529 billion in March and JPY 621 billion in April 2018. Whereas exports were 2.4% fewer than a year earlier, import growth accelerated to 6.4%. The seasonally adjusted trade balance remained in deficit for a second straight month.

Japanese core domestic machinery orders rose 3.8% in March, considerably more than forecast after a 1.8% increase in February but not enough to keep first-quarter core domestic orders from declining 3.2% on quarter and 2.5% on year. Orders for machinery from the public sector dropped 24% last quarter both compared to 4Q18 and a year earlier, while foreign orders sank 12.3% on quarter and 4.2% on year. Officials are assuming the trend in orders will improve in the current quarter.

Japanese supermarket and department store sales in April were respectively 1.0% and 1.1% lower than a year earlier.

British consumer price inflation rose 0.2 percentage points in April to a 4-month high of 2.1%, but core CPI held steady at 1.8% for a third straight time. Producer output price inflation settled back further to 2.1% in April from 2.2% in March and 2.4% in February, while producer input price inflation rebounded to 3.8% from 3.2% the month before and 4.0% in February.

The house price index maintained by the British Office of National Statistics dipped 0.2% on month in March but rose to a 12-month increase of 1.4% from 1.0% in February. At 1.4%, such was still half as much as posted last October-November.

British public sector net borrowing in April, the first month of the new fiscal year, was GBP 5.0 billion, essentially matching the deficit in April 2018. National debt equals 82.7% of GDP.

South African CPI inflation dipped 0.1 percentage point to 4.4% last month. It’s fluctuated between 4.0% and 4.5% since December.

Over the twelve months through April, Polish producer prices rose 2.6%, while polish industrial production posted a 9.2% increase, the largest 12-month advance since July 2018.

Westpac’s measure of Leading Australian economic indicators posted a disappointing 0.09% decline in April and were down 0.5% annualized over the past six reported months.  Construction work completions in Australia sank 1.9% last quarter after drops of 2.1% in the final quarter of 2018 and 3.6% in last year’s third quarter. The Reserve Bank of Australia’s policy Board seems to be inching closer to enacting an interest rate cut.

Retail sales volume in New Zealand, meanwhile, rose 0.7% in the first quarter and was 3.3% greater than a year earlier.

Canadian retail sales grew 1.1% in March, the largest month-on-month increase in ten months, and that resulted in a 2.6% advance compared to a year earlier.

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


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