Confidence Rising that Central Banks Will Counter Deteriorating Global Economic Outlook

June 18, 2019

Today could have been an ugly day in world financial markets.

  • The Japanese Nikkei lost 0.6% overnight.
  • Ten-year sovereign debt yields show big declines of 17 basis points in Italy, 10 bps in France and Spain, 7 bps in the United States and Germany, and six bps in the U.K..
  • The German ZEW Institute’s June survey of investor confidence in Germany and the euro area highlights a big tumble in sentiment, with expectations regarding Germany slumping 19 index points to a 7-month low of 21.1 versus a long-term average reading of +22.0. Sentiment toward Euroland fell to a 5-month low of -20.2 from -1.6 in May.
  • The ZEW Institute report notes that exports, production and retail sales in Germany were each weaker than expected and identifies three big concerns: trade strains, Middle East tensions, and the rising chance of a no-deal Brexit.
  • Evidence emerged of intensifying disinflation. On-year CPI inflation in the euro area fell a half percentage point to 1.2% in May and was down from 2.0% a year earlier. The month-on-month uptick of 0.1% was smaller than expected, and core inflation stood at just 0.8%.

Market momentum got a welcome boost, however, when ECB President Draghi, whose 8-year term ends in October, delivered a very dovish speech asserting the European Central Bank’s willingness to ease further, using a broad range of policy tools, if progress stalls toward attaining the inflation target of “below but close to 2%.” He stressed that the target is a symmetrical one, meaning that in light of prolonged sub-target inflation, the goal is for inflation to exceed 2% at some time in the future.

Earlier released minutes from the Reserve Bank of Australia’s June Board meeting, which cut the Official Cash Rate, also exhibit a dovish tone. Further easing is more likely to occur than not because current drags on wage and price inflation are not likely to dissipate for some time. Australian monetary officials note a weak housing market and worry about the depressing effect that a Sino-U.S. trade war will exert on Australia’s economy. New home prices in Australia fell 7.4% in the year to 1Q19. Having posted quarter-on-quarter declines in each of the past 5 quarters, and in 6 of the last 7, the 7.4% on-year drop in home prices compares to a 10.2% advance between mid-2016 and mid-2017.

In overnight equity market action, share prices rose 1.1% in Indonesia, 1.0% in Singapore, 0.8% in Hong Kong and 0.6% in Australia. In Europe, stocks are thus far up 1.4% in Italy, 1.4% in France, 1.2% in Germany, 0.8% in the U.K. and 0.7% in Spain.

The dollar is narrowly mixed, with losses of 0.4% against the peso and 0.3% relative to the yen and kiwi but gains of 0.2% vis-a-vis the euro and 0.1% against the Swiss franc, Aussie dollar, and sterling. The loonie and yuan are unchanged.

West Texas Intermediate crude oil dipped 0.3% further and is below $52 per barrel, whereas Comex gold strengthened nearly 1% so far today and is above $1,350 per ounce.

Euroland’s seasonally adjusted trade surplus contracted to a five-month low of EUR 15.3 billion in April. Exports (down 2.4% on month) contracted three times more sharply than imports. The year-to-date surplus of EUR 59.6 billion was 7% smaller than in January-April of 2018.

European Union car registrations, a proxy for new car sales, ticked up 0.1% in May, breaking a streak of eight consecutive monthly declines. The five-month year-to-date total was still 2.1% lower than a year earlier.

Chinese house prices in 70 major cities posted a 0.7% on-month rise in May, the biggest gain so far this year and signaling a continuing robust housing market in spite of government curbs on borrowing.

The Westpac measure of quarterly consumer confidence in New Zealand dipped further to a reading of 103.5 this quarter versus 108.6 in the second quarter of 2018 and 113.4 in the second quarter of 2017.

Treasury-compiled U.S. capital movement data for April showed significant net inflows but the year-to-date inflow remains substantially less than what occurred during 2018.

Turkish industrial production dropped 1.0% on month and 4.0% on year in April.

Just in: U.S. housing starts in May dipped by a smaller-than-forecast 0.9% in May and were 4.7% lower than a year earlier. Permits were little changed from April’s level or their year-earlier level.

Tomorrow’s event menu features the fourth scheduled FOMC policy announcement of 2019, which will include updated forecasts from the committee and a press conference by Chairman Powell. There will also be central bank policy announcements in Turkey and Thailand. Japan reports customs trade. British CPI and PPI figures get released, and so does Euroland’s current account report.

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

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