Sterling Up, Yuan Down

August 22, 2019

Sterling strengthened 0.9% against the dollar and euro overnight. This appreciation was a response to remarks by German Chancellor Merkel after talks with British Prime Minister Johnson. Merkel considers a solution on the contentious border issue between Northern Ireland and the rest of Ireland still possible by the October 31st Brexit deadline.

The Chinese yuan fell another 0.3% overnight and touched an intraday low of 7.0933 per dollar, its weakest level since the middle of March 2008. At that level, the yuan was 2.9% below its end-July level and down about 15% from its January 2014 high. The yuan is more or less equidistant between that high and the 8.28 per dollar fixed level maintained from 1994 until a 2.1% revaluation to 8.11 on July 21, 2005. That surprise adjustment began an era of controlled mini-adjustments consistent with market forces. Today’s slide of the yuan would have been even greater if the government-owned banks had not provided intervention support.

The dollar otherwise rose 0.3% against the kiwi, 0.2% versus the peso, and 0.1% relative to the Swiss franc and Aussie dollar. The greenback is unchanged against the euro and loonie and down 0.1% against the yen.

Equity markets around the world are mixed. U.S. stocks opened moderately higher, but markets in Asia closed down 1.6% in India, 0.8% in Hong Kong, 0.7% in South Korea, and little changed in Japan and China. Stock markets in Europe are up in Spain and Italy but down in Great Britain.

Among commodity prices, WTI oil jumped 1.3% thus far, while gold eased 0.6%.

Ten-year sovereign debt yields climbed four basis points in Germany and the U.K. but dipped a basis point in the United States.

There’s been an unexpected second consecutive cut of Bank Indonesia’s 7-day reverse repo rate, which now becomes 5.50%. Overnight deposit and lending rates were also sliced 25 basis points to 4.75% and 6.25%. Indonesia’s central bank interest rates had been lifted by 175 basis points last year, with the final move in November, in order to counter the inflationary threat of rupiah depreciation. The initial rate reduction this year happened a month ago. A statement released by the BI Board today characterizes the easing as a “pre-emptive measure to stimulate growth.” The statement asserts that inflation likely will fall below the target midpoint, notes that global demand is moderating amid trade tensions and geopolitical risks, and points out that fiscal and monetary policies are being loosened in other economies. The statement does not indicate the possible timing of further interest rate changes in Indonesia.

Central bank watchers have two other events upon which to focus. FOMC minutes published yesterday reflected a greater dispersion of views about interest rates on the committee ranging from a couple wanting to reduce the federal funds target in July by 50 basis points to some that favored no cut then. The decision to cut by 25 basis points was a compromise representing a “recalibration” (not the first of several planned declines), warranted by trade war uncertainties and slower external growth. Secondly, the three-day K.C. Fed-sponsored central bank symposium in Jackson Hole WY begins today. This annual event always Fed Chairman Powell will deliver an address on Friday.

Japan’s all-industry index, a monthly proxy of GDP, sank 0.8% in June, more than reversing May’s 0.5% rise. Likewise, its 0.5% rise last quarter merely offset a similar drop in 1Q. Thus, the June all-industry index level was 0.3% lower than a year earlier, and the second-quarter average level was just 0.2% higher than in the second quarter of 2018.

Better news for Japan came from the August preliminary purchasing managers survey, where the composite index rose 1.1 points to an 8-month high of 51.7. That faster rate of improvement was led by a 22-month higher services component of 53.4. But the manufacturing PMI of 49.5 was below 50, the level designating neither improving conditions not deterioration.

Preliminary PMIs were reported also for Australia, Euroland, Germany, and France.

  • Australia‘s CBA-compiled composite PMI fell 2.6 points to a 5-month low of 49.5. Manufacturing conditions grew at the slowest pace in three months, and the services component of 49.2 connotes a contractionary trend for the first time since March.
  • Euroland‘s composite, manufacturing and service-sector purchasing manager indices of 51.8, 47.0, and 53.4 in August each represent 2-month lows. They suggest third-quarter GDP growth of 0.1-0.2%. Business sentiment fell to a 75-month low.
  • Germany‘s services PMI fell 1.1 points to a 7-month low of 54.4, suggesting that the recession in manufacturing (43.6) is depressing other sectors of the economy. With incoming orders at a 76-month low and business sentiment regarding the 1-year outlook at an 81-month low, it looks like things will get worse in Germany before they start to get better.
  • France is doing better than Germany. The composite and manufacturing PMIs printed at 2-month highs of 52.7 and 51.0 in August, while the serevices PMI rose 0.7 to a 9-month high of 53.3.

Swiss industrial production grew 1.1% in the second quarter and 4.8% from a year earlier, which was the best on-year gain since 2Q18.

Canadian wholesale turnover rose 0.6% in June and 2.3% compared to a year earlier.

Danish and Turkish consumer confidence in August improved to 11- and 4-month highs, respectively.

Consumer confidence in the euro area declined 0.5 index points to a 2-month low of -7.1 in August, according to its preliminary estimate.

Released U.S. data today showed a very low total of new jobless insurance claims last week of 209K, an improved 0.5% rise in the Conference Board’s index of leading U.S. economic indicators in July, and a 5-point decline in the composite KC Fed manufacturing index to minus 6 in August.

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

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