Central Banks and Manufacturing PMI Reports in the Spotlight

August 1, 2019

The Bank of England Monetary Policy Committee left policy settings unchanged by a unanimous 9-0 vote as was expected. Today’s report coincided with the release of the quarterly Inflation Report. Projected growth in the U.K. last quarter was likely zero percent and that for 2019 has been lowered to 1.3%. The forecast assumes a Brexit deal but acknowledges the risk of no deal. The effects of Brexit on the economy and therefore future monetary policy are varied and highly uncertain. Ultimately, policy will be guided by what it takes to steer inflation toward its medium-term target of 2.0%. The Bank of England’s Bank Rate has been at 0.75% since the second of two 25-basis point hikes in August 2018. The first tightening was made in November 2017.

Investors takeaway from Fed Chairman Powell’s press conference yesterday is that the rate cut is not necessarily the first of many cuts but possibly a downward correction within a tightening cycle that will have just a couple of moves. This was what the Fed did in 1998-99.  U.S. share prices dived sharply during Powell’s press conference, with the DJIA closing almost 400 points below its level at the start of the conference. Equities, however, started today on a rising note.

The Czech National Bank unanimously held its 2-week repo rate at 2.0%. From a low of 0.05% early in 2017, such was lifted by 45 basis points to 0.50% at the end of that year and by a further 125 basis points in 2018. The most recent increase of 25 bps to 2.0% was engineered three months ago. A released statement today  notes that inflation is above the 2% target but not unduly so. In order to steer inflation back to 2%, the statement hints that rates have not yet peaked.

The Central Bank of Brazil’s policy committee, Copom, cut the Selic Rate by a greater-than-anticipated 50 basis points  to 6.0% and released a statement that implies but doesn’t guarantee further reductions. Today’s action resumes an easing cycle that ran from October 2016 to March 2018. The Selic rate had been 13.75% when the easing began but had to be interrupted because of a rise in inflation caused by a depreciation of Brazil’s currency, the real. Today’s resumed easing is justified by an improved inflation outlook, rate cuts elsewhere, weak domestic growth, and domestic fiscal reforms. “The Committee deems that the consolidation of the benign scenario for prospective inflation should permit additional adjustment of the degree of stimulus. The Copom emphasizes that communicating this assessment does not restrict its next decision and reiterates that the next steps in the conduct of monetary policy will continue to depend on the evolution of economic activity, the balance of risks, and on inflation projections and expectations.”

In today’s market action, the dollar has fallen 0.5% against the yen, 0.3% relative to the Swiss franc, and 0.1% vis-a-vis the Australian dollar. The dollar climbed 0.3% against sterling, as the Bank of England against warned that a no-deal Brexit could lead to a recession. The dollar also firmed 0.3% against the yuan and 0.1% against the loonie, and it is steady relative to the euro, kiwi and  peso.

The price of WTI crude oil has fallen 2.6%, and gold is 1.1% weaker.

Ten-year sovereign debt yields are down 4 basis points in the United States, 3 bps in Great Britain and 1 basis point in Germany. But the 10-year Japanese JGB yield firmed two basis points.

Equity markets are a little firmer in Euroland but down in the U.K.. Stocks fell .8% in China and 1.2% in India but edged up 0.1% in Japan.

The Institute of Supply Management’s U.S. manufacturing purchasing managers index slid another 0.5 points to 51.2, but it could have been worse. Sub-indices dropped 3.3 points for production and 2.8 points each for jobs and prices.

Euroland’s IHS-compiled manufacturing PMI fell 1.1 points to a 79-month low of 46.5 in July. Scores for Germany, France, Italy, Ireland, Spain, and Austria ranged from 43.2 to 49.7, indicating deteriorating conditions in all those economies. Negative factors are Brexit, protectionism, and auto industry disruption. Inflation, already below target, continues to recede.

Britain’s manufacturing purchasing managers inde remained at June’s 76-month low of 48.0.

Japan’s PMI ticked up 0.1 point to a 2-month high but was below the 50 no-change level for a third straight month.

In other Asian economies, the PMIs fell to a 6-month low of 49.6 in Indonesia. Malaysia’s 47.6 PMI is aat a 4-month low. The Filipino PMI slid to a 7-month low of 52.1. South Korea’s 47.3 score is a 5-month low. Thailand’s 50.3 was a 4-month low, and Taiwan’s 48.1 is a 2-month low. Alternatively, China’s 49.9 reading represents a 2-month high, and so does India’s 52.5 reading. Vietnam’s PMI edged up 0.1 point to 52.6.

Turkey posted a 2-month low manufacturing PMI score of 46.7.

South Africa’s PMI reading, 52.1, surpassed the 50 level between implying contraction or expansion for just the first time since the last month of 2016.

Brazil’s 49.9 was below 50 for the first time since June 2017.

Norway‘s 48.4 represented a 3.0-point drop near to a 3-year low. Sweden’s PMI stayed at June’s 2-month low of 52.0.

Eastern Europe: The Czech PMI sank to a 122-month low of 43.1. Poland’s 47.4 was the weakest reading since April 2013. But Russia’s manufacturing PMI index rose 0.7 points to a 2-month high of 49.3.

Canada’s PMI edged above 50 for the first time since March to reach 50.2.

In other economic data news,

  • U.S. construction spending fell 1.3% in June, a considerably weaker-than-forecast result.
  • New U.S. jobless insurance claims remained historically low last week at 215K.
  • The volume of Hong Kong retail sales posted another on-year drop in June, this time of 7.6%.
  • Indonesian CPI inflation rose a tad to 3.32% this month, but core inflation slid marginally.
  • South Korean CPI inflation of 0.6% in July was lower than forecast.
  • Australia’s terms of trade (export/import price ratio) improved last quarter. Export prices increased 3.8% on quarter and 17.4% on year, while imports went up 0.9% on quarter and just 2.8% on year.
  • Brazilian industrial production was 5.9% lower in June than a year earlier.

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



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