Problems Deepen in Europe But Appetite for Riskier Assets Returns

September 5, 2019

German industrial orders slumped 2.7% in July, almost twice as steeply as forecast. This wiped out June’s recovery and left orders 5.6% below their year earlier level. Demand weakness was broadly based across industrial sectors but more concentrated exports than domestic demand.

The construction purchasing managers index in Euroland sank 1.5 points in August, sliding below the 50 no change level for the first time in 34 months to 49.1. Germany’s reading of 46.3 was at a 62-month low, and Italy’s 48.1 score indicated the sharpest pace of contraction in 17 months. The French construction PMI, by contrast, rose 0.2 points to an 8-month high of 52.6.

Consumer confidence in Spain sank 11 points to a 55-month low of 86 in August.

On-year growth in Swiss real GDP slowed to a mere 0.2% in the second quarter, weakest since the final quarter of 2009. Drags were exerted on the 0.3% quarterly uptick by business investment and net foreign demand.

On-year growth in Cypriot real GDP of 3.2% last quarter was the lowest since the third quarter of 2015 and down from 3.8% in the second quarter of 2018. Cyprus also reported August CPI figures showing a third on-year decline. Consumer prices were 0.7% below their August 2018 level, which compares with a 2.0% on-year increase last January.

The Swedish Riksbank kept its repo rate unchanged at minus 0.25% as had been expected. Although forward guidance in the released statement from the Executive Board of the central bank still implies a second rate increase within the next couple of months, official confidence in that path has declined. “However, market rates have fallen substantially and global interest rates are expected to remain low for a longer period of time. Together with the worsened sentiment, this underlines the importance of proceeding cautiously with monetary policy. The economic prospects are based on the repo rate being raised at a slower rate in the period ahead than in the previous forecast…. The forecasts consider that sentiment has deteriorated but assume that there will not be any further significant downturns in confidence among households and companies abroad and in Sweden. If the economic outlook and inflation prospects were to change, monetary policy will be adjusted.”

Ten-year sovereign debt yields in Europe continued to rise on Thursday, with increases so far of 8 basis points in the U.K., 7 bps in Italy, 6 bps in Spain and 5 bps in Germany and France. The 10-year U.S. Treasury futures yield also rose 5 basis points, and the comparable Japanese yield is two basis points firmer.

Equity markets in Europe are up 0.9% in Germany and France, 1.1% in Spain, 0.6% in Italy and Spain and 0.5% in Switzerland, but the British Ftse has dropped 0.7%. In the Brexit saga, the tide today is running swiftly against Prime Minister Boris Johnson. His request for a snap election on October 15 failed to get sufficient parliamentary support as Labour MPs withheld their vote. Parliament also passed two more bills making a no deal Brexit illegal. And throwing salt in BoJo’s wounds, his own brother left the government, resigned his parliamentary seat and declared that the prime minister is not acting in the national interest.

While a British election next month is now ruled out, announcement was made that U.S. and Chinese trade negotiators would be holding talks next month. But that decision does not appear to reflect a thaw in the two government’s increasingly confrontational relationship.

Equities in Asia closed up 2.1% in Japan, 1.0% in China, 0.9% in Taiwan, 0.8% in South Korea, 0.6% in Indonesia, 0.5% in Singapore but unchanged in Hong Kong and down 0.2% in India. Stocks in Australia and New Zealand advanced by 0.9% and 0.8%, while U.S. futures suggest a rise at the open as well.

Gold and oil have slipped by 0.7% and 0.2%.

Safe havens like the dollar, Swiss franc and yen are lower. The franc and Japan’s currency have fallen 0.3% and 0.2% against the dollar, which otherwise fell overnight by 0.9% versus sterling, 0.6% relative to the kiw and peso, 0.4% vis-a-vis the Aussie dollar, 0.3% against the loonie and 0.2% relative to the euro. The yuan is steady.

CPI inflation in the Philippines dropped 0.7 percentage points to a near 3-year low of 1.7% last month. That’s down from 6.7% last October and below the floor of the central bank’s target range.

Australia’s trade surplus of A$ 7.268 billion in July was a 2-month low. The seven-month accrued surplus of A$ 41.5 billion, however, was 4.5 times greater than a year earlier.

Yesterday’s released Fed Beige Book found modest growth in six of the twelve districts, moderate growth in the Dallas and San Francisco districts, and pretty flat activity in the districts of Cleveland, Atlanta, St. Louis and Minneapolis. Manufacturing is troubled but other sectors are okay so far. Business optimism outside manufacturing and Agriculture is proving resilient at least over the comparatively short term time horizon.

A spate of comments from Fed officials yesterday revealed division among policymakers about whether to cut interest rates again at this month’s meeting.Today’s U.S. data menu includes factory orders, the non-manufacturing purchasing managers survey, ADP’s estimate of private-sector employment growth, and weekly jobless insurance claims.

The National Bank of Ukraine is holding a monetary policy review today.

Hurricane Dorian is on a path aimed at Charleston, South Carolina and surrounding communities. Very heavy flooding is feared.

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


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