Markets React to ECB Stimulus, U.S. CPI Data, and Continuing Hopes on Trade Talks

September 12, 2019

Policymakers at the European Central Bank as expected cut the deposit rate by 10 basis points to minus 0.50%, announced an open-ended asset purchase program to start in November at EUR 20 billion per month, said targeted LTRO operations will carry the average deposit rate, and introduced a a 2-tiered system of reserve remuneration in which part of banks’ holdings of excess liquidity will be exempt from the negative deposit facility rate. The rate cut was the first in more than 3 years. The earlier experience with quantitative stimulus through bond buying only ended at end-2018 and created EUR 2.6 trillion of liquidity. Inflation has stubbornly remained well under target, and growth risks in the common currency area have become increasingly skewed in a downward direction as underscored by July industrial production data released earlier today.

Euroland industrial production fell 0.4% on month and 2.0% on year in July. There has been only one month-on-month increase in output over the last six reported months, a period during which on-year output was below zero percent without interruption.

Total U.S. CPI inflation dipped 0.1 percentage point to 1.7% in August. The 12-month rate of increase has ranged between 1.5% and 2.0% since last December. Core CPI exceeded street expectations, rising 0.3% for a third straight time and accelerating to a 13-month year-on-year high of 2.4%. That’s the top of a 2.0-2.4% range since March 2018.

Optimism that U.S. and Chinese negotiators will avert a full-scale trade war seems to stem from Trump’s delay of some previously threatened tariff hikes. Take that olive branch with a grain of salt. Trump’s deal-making style often involves outrageous initial demands that then bounce around to keep his opponent off balance.

The dollar advanced 0.8% overnight against the euro but is otherwise down 0.4% versus the yuan, 0.3% relative to the Mexican peso, and 0.1% vis-a-vis the yen, kiwi and Aussie dollar. Dollar/Swissie is unchanged, and the dollar has edged up 0.1% against sterling and the loonie.

The recent back-up in 10-year sovereign debt yields reversed ground today with drops of 7, 6, 5, and 1 basis points in Germany, the U.S., Great Britain and Japan.

Share prices rose 0.8% in Japan and China and show a similar gain so far in Germany.

West Texas Intermediate crude oil slumped 2.4%, while Comex gold strengthened 1.5% overnight.

Central bank policy announcements were also made in Malaysia, Turkey and Serbia.

Bank Negara Malaysia’s policy rate was kept unchanged at 3.0%, it’s level since May when a 25-basis point cut reversed a previous 25-basis point hike in January 2018. GDP growth this year is projected at 4.3-4.8%, and inflation is expected to remain low and stable, making an accommodative monetary policy appropriate.

Policymakers at the Central Bank of the Republic of Turkey slashed the one-week repo rate by a greater-than-expected 325 basis points in follow-up to a 425-basis point cut in July from a peak of 24.0% that had prevailed since a 625-basis point increase in September of 2018. The rate now becomes 16.5%, which the monetary policy committee considers cautiously tight. Officials took into consideration the facts that policy stimulus is occurring at other central banks and a downward but unspecified revision of the future disinflation path assumed in July’s Inflation Report. Actual inflation, core inflation, and price expectations are moderating, and domestic demand is growing slowly.

Serbia’s policy interest rate was left at 2.5%, its level since cuts of 25 basis points in both July and August. 50 basis points of rate cuts were also engineered last year.  In Serbia, inflation remains low both overall and core, and Moody’s recently upgraded the country’s credit rating to positive. Both the budget and current account deficits have been reduced.

In other data out today,

Japan’s tertiary index of service sector activity edged up 0.1% in July after back-to-back declines of 0.1% in the previous two months. The 12-month increase of 1.5% was the most in 14 months.

Japanese core domestic machinery orders fell 6.6% in July, reversing half a 13.9% rise in June and resulting in an on-year uptick of just 0.3%. Government and export orders were respectively 18.3% and 16.1% lower than a year earlier.

Japanese domestic producer prices fell 0.3% on month and 0.9% on year. Export and import prices in August were 5.7% and 8.6% below year-earlier levels.

German CPI inflation confirmed the preliminary estimates of -0.2% on month and +1.4% on year (a 3-month low) in August. Core CPI also rose 1.4% on year.

French CPI inflation slowed 0.1 percentage point to a 3-month low of 1.0% in August, while Irish CPI inflation edged up 0.2 percentage points to a 2-month high of 0.7%.

The combined Swiss PPI/import price index fell 0.2% on month and 1.9% on year in August.

Indian CPI inflation accelerated 0.06 percentage points to 3.21% in August, which still remains below the central bank’s target of 4%.

Industrial production advanced 4.3% on year in India in July but by only 0.4% on year in the second quarter in politically unsettled Hong Kong.

Food prices in New Zealand notched their biggest on-year advance in 16 months in August, which was 2.1%.

Chinese foreign direct investment in the first eight months of 2019 was 6.9% greater than a year earlier.

Canadian new house prices dipped 0.1% on month and by 0.4% on year, which is the biggest 12-month slide in nearly 10 years.

New U.S. jobless insurance claims totaled only 204K last week, depressing the 4-week average to 212.5k.

Peru’s central bank is reviewing monetary policy today. South Korea observed the Chusak holiday, and OPEC has cut its projection of global oil demand in 2020. At last look, the DOW is 0.4% higher.

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


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