U.S.-Sino Trade Relations Remains at Center Stage

August 15, 2019

The trade war between China and the United States rumbles on. While scheduled U.S. tariff hikes have been delayed to December, Beijing officials are not inclined to give the Trump Administration what it seeks and instead are preparing to retaliate in kind. A senior officials at the Reserve Bank of Australia expressed reservations about the U.S. yield curve as a predictor of future recessions but identified the trade dispute as the main threat to the continuing record-long expansion there.

Share prices overnight fell 1.2% in Japan, 1.4% in New Zealand, 1.0% in Taiwan but rose 0.3% in China and 0.8% in Hong Kong. In Europe, equity markets are down 1.2% in the U.K., 0.9% in Germany, 0.6% in France and 0.3% in Spain, but they are up 0.4% in the United States.

Ten-year sovereign debt yields slid a basis point in the United States, Germany, and Japan. At this moment, the 10-year Treasury yield is 1.5 basis points above the 2-year yield. Such inverted briefly yesterday, send a surge of risk aversion through world financial markets.

The prices of WTI oil and Comex gold are 0.5% and 0.3% below Wednesday closings.

Overnight movements in the dollar are mixed with losses of 0.5% against sterling, 0.4% versus the Australian dollar and 0.1% vis-a-vis the kiwi and peso but rises of 0.2% agains the yen, Swiss franc, and yuan and 0.1% relative to the loonie. The EUR/USD relationship shows no net change.

The executive board at the central bank of Norway known as Norges Bank left its policy interest rate at 1.25% at today’s review but modified forward guidance. Three 25-basis point rate hikes were engineered already, most recently at the prior meeting in June but also back in March and last September. Officials in June predicted another increase before year end but now hedge that likelihood. A statement released after the meeting concludes, “the global risk outlook entails greater uncertainty about policy rates going forward.” This is not so because of weaker-than-expected Norwegian economic trends: “new information indicates that the outlook for the policy rate for the period ahead is little changed since the June Report.” New risks have emerged: “Deepening trade tensions and heightened uncertainty surrounding the UK’s relationship with the EU may weigh on growth abroad and in Norway. On the other hand, a weaker krone may contribute to higher inflation ahead.”

Several U.S. economic statistics were released today.

  • Business inventories were unchanged in June, which is a tad less than assumed in the latest 2Q GDP estimate.
  • Industrial production fell 0.2% in July. That also is worse than forecast and depresses the 12-month rate of increase to 0.5%. Factory output dropped 0.4% on month and 0.5% on year. Capacity utilization dropped 0.3 percentage point to 77.5% in July.
  • Retail sales in July beat expectations, climbing 0.7% on month and 3.4% on year. Core sales growth also surpassed forecast.
  • The Philly Fed manufacturing index, which has spiked to a 21-month high in July, dropped five points to a 2-month low of 16.8 in August. But the Empire State manufacturing index rose half an index point to a 3-month high of 4.8.
  • The National Home Builders monthly housing index rose a point to a 3-month high of 66.
  • Non-farm labor productivity rose 2.3% at an annualized rate last quarter and by 1.8% from a year earlier. The first-half pace of 2.9% was 1.6 percentage points higher than in full-2018. Unit labor costs grew 2.4% annualized and 2.5% on year in the second quarter, which is soft relative to productivity.
  • New jobless insurance claims rose 9k last week, resulting in a 4-week average of 213.75k versus 218.75k per week in the prior 4-week span.

After advancing unexpectedly by 0.9% in June, British retail sales volume had been expected to drop in July but instead rose 0.2% on month. The 12-month increase slowed to 3.3%.

The June drops in Japanese industrial production and shipments got revised to 3.3% and 4.0%, respectively. The inventories to shipments ratio was 6.6% higher than a year before. Capacity usage declined 2.6% on month and 1.8% on year.

Australian labor statistics for July were better than assumed. The jobless rate remained at 5.2%, but employment rose slightly more than 40k for the third time in four months. A 34.5k increase in full-time workers with benefits was the most in this period, and the labor participation rate edged up 0.1 percentage point to 66.1%.

The combined Swiss PPI/import price index failed to rise for a fourth straight month, instead dipping 0.1% in June after a 0.5% May decline. Both domestic producer prices and import prices fell 0.1%, and a 1.7% 12-month rate of decline in the overall index was the most in 38 months.

The 12-month rate of rise Chinese home prices dipped below 10% for the first time since December to 9.7% in July. Prices advanced in 60 of 70 examined cities, down from 63 in June.

Norwegian consumer confidence this quarter improved to a 3-quarter high. But Norway’s January-July trade surplus was a third smaller than a year earlier.

Indonesia’s January-July trade deficit of $1.9 billion was down from $3.2 billion a year before.

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



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