Unorthodox Appointments, Service Sector PMIs, and an Early Market Close in the United States

July 3, 2019

The dollar recorded scant net change Wednesday aside from 0.6% declines against the Australian and New Zealand dollars.

Share prices fell 1.1% in China and 0.5% in Japan but were buoyed  in Europe and the United States by some unexpected key appointments that investors are perceiving as a harbinger of more forceful easy money policies.

  • To fill vacancies on the Federal Reserve Board of Governors, U.S. President Trump has appointed Judy Shelton, a gold standard advocate and critic of current Fed policy, which she believes is too activist, too discretionary, and insufficiently accommodative, and Chris Waller, an executive VP at the St. Louis Fed, whose president cast the sole dissenting vote at last month’s FOMC meeting. Trump has been relentlessly critical of Fed policy, and these appointments are contingent on senate approval. Their presence at the FOMC would create a more dovish bias.
  • Christine Lagarde was selected by the European Council as president of the European Central Bank for the next eight years. As IMF managing director, Lagarde is well known in international circles, but she’s a lawyer and bureaucrat by training with no prior experience in monetary policy, which sets her apart from her three predecessors. Ten-year sovereign debt yields dived today by 20 basis points and widely in several other European countries in response to the choice of Lagarde, whose widely seen as dovish and pro-growth on interest rates.
  • The European Council also selected Ursula von der Leyen, Germany’s defense secretary since 2013 and a member that country’s cabinet since 2005, to be EU Commission President. She will be the first woman to hold that top post.

Commodity prices strengthened today. WTI oil climbed 1.1%, and gold is 0.7% higher.

The ISM’s U.S. non-manufacturing purchasing managers index dropped 1.8 points  in June to a 23-month low of 55.1 and would have weakened even more sharply if not for a 3.5-point increase in the  prices subcomponent. Measures for jobs, production, and orders respectively declined 3.1, 3.0, and 2.8 points between May and June.

Euroland’s IHS-compiled services PMI, by contrast, rebounded 0.7 points last month to an 8-month high of 53.6. The highest readings in nine and seven  months were scored by Germany and France, and Spain and Italy each recorded 3-month highs. Nonetheless, in connection with depressed manufacturing, the PMIs only point to second-quarter GDP growth of about 0.2% in the euro area.

The situation is worse in Great Britain, where a composite manufacturing and services PMI score of 50.2 along with just 43.1 in the construction PMI suggests that real GDP likely fell 0.1% in 2Q. That would constitute the first negative quarterly growth since early spring of 2009.

China’s composite and services purchasing manager indices in June of 50.6 and 52.0 represent 8- and 6-month lows.

Japan’s composite and service-sector PMIs (50.8 and 51.9) recovered to 2- and 3-month highs but still suggest meager growth.

India’s composite and services PMIs fell to 13-month lows in June of 50.8 and 49.6.

Russia’s composite and services PMIs fell to 41-month lows in June of 48.2 and 49.7.

Private sector purchasing manager indices released for South Africa by Standard Bank, Singapore, and Lebanon had readings of 49.7 (a 2-month high), 50.6 (a 2-month low) and 46.3, which matches May’s 5-month low.

Non-oil purchasing manager indices for Egypt, Saudi Arabia, and the U.A.E. were respectively 49.2 (a 2-month high), 57.4 (a 19-month high) and 57.7 (a 2-month low).

Service sector PMI readings for Australia in June were at a 2-month low of 52.2 on the data compiled by AIG and 52.6 (a 6-month high) on CBA’s measure. The composite PMI compiled by CBA also rose to a 6-month high.

Two central banks completed scheduled monetary policy reviews today:

  • The Executive Board of the Swedish Riksbank maintained a negative 0.25% repo rate. Seven months ago, the rate was lifted by 25 basis points from -0.50% where such had been since February 2016. Previously, the benchmark had been at zero percent or lower since a cut in October 2014. A statement explaining today’s decision calls growth strong and inflation close to its 2% target. Officials did not make any significant forecast revisions, observe continuing external uncertainties, and provide a forward guidance suggesting the next rate hike is likely to occur either late this year or early in 2020.
  • The Central Bank of Poland likewise kept its policy interest rate unchanged at 1.5%. That’s been the level since a 50-basis point cut in March 2015. In a released statement, members of the Monetary Council express confidence that inflation will remain moderate. “the outlook for economic conditions in Poland remains favorable, and GDP growth will continue at a relatively high level in the coming years. At the same time, inflation will remain moderate and, in the monetary policy transmission horizon, will stay close to the target. Such an assessment is supported by
    the results of the July NBP projection.”

There were four notable U.S. data reports today before the Independence Day break. First, factory orders dropped 0.7% in May following a 1.2% decline in April. Orders over January-May were only 0.9% greater than a year earlier. Second, the goods and services trade deficit widened $4.3 billion on month in May to a 5-month high of $55.5 billion ($76.1 billion on merchandise goods). Third, ADP monthly estimated growth in  private-sector jobs, 102K, was considerably less than analysts were anticipating. And fourth, weekly jobless insurance claims fell 8k to 221k.

In contrast to the wider U.S. trade deficit, Canada announced only its second monthly trade surplus since late 2016. The C$ 762 billion black-ink balance followed a deficit of $1.083 billion  in April.

Australia also had a strong trade position in May of A$ 4.745 billion, which constitutes an all-time high surplus.

SACCI’s measure of South African business confidence recovered 0.3 points to 93.3 in June but remained below its mid-2018 level.

Turkish CPI and PPI inflation eased to 1-year lows in June of 15.7% and 25.0%, respectively. Inflation had crested previously at 25.2% on the CPI and 46.1% on the PPI.

Shop prices  in the U.K. were 0.1% lower in June than a year ago.

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


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