Geopolitical Strains, Weak Data, and a Poor Bond Auction as New Quarter Kicks Off

October 1, 2019

As China observes National Day, increasingly violent protests in Hong Kong evoked a Kent State moment as one protester has been shot there. Half a world away, President Trump’s team stepped up its manhunt for the impeachment whistle blower. Britain, too, is convulsed by its own constitutional crisis, ans the Conservative Party prepares for its annual conference with an as-yet unrevealed Brexit plan.

Sovereign debt yields leaped upward around the world following a much weaker-than-expected Japanese bond auction. 10-year sovereign yields are up 7 basis points in the U.S. and U.K., 6 bps in Japan, and 4-5 bps across Continental Europe. One concern is that the European Central Bank may not ease monetary policy much further, and another is that any fiscal support will be only tepid.

Markets in China and Hong Kong were closed for holiday. Elsewhere in the Pacific Rim, share prices rose 1.3% in Taiwan, 0.8% in Australia, New Zealand and Singapore, 0.5% in South Korea, and 0.6% in Japan but fell 0.9% in India and 0.5% in Singapore. European equity markets so far show losses of 0.3% in the U.K. and Switzerland, rises of 0.6% in Italy and 0.2%  in Spain and scant net movement in Germany or France. Gold is also flat.

But West Texas Intermediate oil rose 1.1%.

The dollar overnight advanced 0.7% against the Australian dollar and 0.6% versus the kiwi following news of a third 25-basis point cut since June in the Reserve Bank of Australia’s official cash rate, which now moves to a record low of 0.75%. A statement from that central bank left the door open to even more monetary easing “if needed” to support growth in household incomes and jobs and to better align inflation with its medium-term target. In any case, monetary officials plan to keep interest rates low “for a while.”

Against other key currencies, the dollar is unchanged against the euro and sterling, up 0.3% relative to the Swiss franc and 0.2% stronger vis-a-vis the yen, loonie and peso.

Being the first day of a new month, Tuesday has seen the release of numerous manufacturing-sector purchasing manager survey results. In addition, the Bank of Japan reported the results of its quarterly Tankan survey of corporate conditions and expectations, and Eurostat released its estimate of CPI inflation last month in Euroland.

Total euro area inflation slipped below 1.0% for the first time in September since the final month of 2016. At 0.9%, such was down from 2.1% a year earlier. For key economies using the euro, CPI inflation slowed between September 2018 and last month by 1.3 percentage points (ppts) to 0.9% in Germany, 1.4 ppts to 1.1% in France, 1.2 ppts to 0.3% in Italy, by 2.1 ppts to 0.2% in Spain and by 2.2 ppts to 0.6% in Belgium. Core consumer price inflation (excluding energy and food) was 1.0% in the latest month, same as in September 2018.

Among the 9,719 firms surveyed by the Bank of Japan in September, the diffusion indices for large manufacturers and large non-manufacturers each slipped 2 points compared to June results, and additional deterioration is anticipated during the final quarter of 2019. The diffusion index for all surveyed firms fell to +8 in September from +10 in June, +12 last March and +16 in the final quarterly survey of 2018. Expected sales, earnings and planned investment this fiscal year, which ends next March, were each revised lower compared to what respondents thought three months ago.

Japanese labor market statistics were also reported. The jobless rate held steady in August at a 26-year low of 2.2%, and so did the ratio of job seekers to offers. Employment was 1.1% higher than a year earlier.

Euroland’s manufacturing purchasing managers index dropped 1.3 points to an 83-month low of 45.7 in September. The group’s biggest economy, Germany, also had the lowest PMI reading, a 123-month low of 41.7. PMI scores for Austria (45.1), Spain (47.7), Italy (47.7) and Ireland (48.7) also reflected deteriorating conditions, while the 2-month high of 50.1 in France suggested a stagnant manufacturing sector.

The British manufacturing PMI rose 0.9 points to a 4-month high but was under the 50 level that separates improving from deteriorating conditions for a fifth straight month.

Japan’s manufacturing PMI declined 0.4 points to a 7-month low of 48.9 in September.

India posted a joint 16-month PMI low in manufacturing that matched August’s 51.4 score.

Australia’s CBA-conducted survey of manufacturers produced the lowest PMI reading (50.3) from the 40 months that it has been taking a survey, but the longer AIG survey of Australian manufacturers rose 1.6 points to a 5-month high of 54.7.

Among other European economies where PMI survey results were reported today, Russia’s manufacturing index fell to a 125-month low of 46.3. The Czech score of 44.9 was unchanged from the month before but higher than July’s reading, and Poland’s 47.8 PMI was just 0.4 points above July’s 75-month low. The Swiss PMI of 44.6 was down from 47.2 and represents the fastest rate of deterioration since mid-2009. Sweden’s PMI of 46.3 after a downwardly revised 51.8 was at a 75-month low, and Norway posted a 50.4 PMI, which was a 2-month low.

Turkey’s manufacturing PMI of 50.0 broke a string of 17 consecutive sub-50 monthly readings, whereas the ABSA-compiled South African PMI sank sharply to a 121-month low of 41.6 from 45.7 in August and 52.1 in July.

Other East Asian PMIs results today included a 4-month Malaysian high of 47.9, a 12-month Taiwanese high of 50.0, 2-month highs of 49.1 in Indonesia and 50.6 in Thailand, but also Vietnam’s 43-month low of 50.5 and a 3-month low of 51.8 in the Philippines.

South Korea reported other indicators overnight such as a $5.97 billion 11-month high trade surplus in September. The year-to-September cumulative surplus of $29.2 billion was, however, well below the year-earlier 9-month surplus of $54.4 billion. Consumer price inflation in South Korea of 0.4% slipped below 0% for the first time since at least 1965, and the economy’s business sentiment index among manufacturers rose to a 3-month high in October.

On-year growth in Japanese motor vehicle sales tripled to 12.8% in September.

Indonesian CPI inflation decelerated 0.1 percentage point to a 2-month low of 3.4% in September. CPI inflation in the Philippines doubled to a 4-month high of 1.6% in August.

Australian building permits fell 1.1% in August, their fifth monthly drop in six months, and were 25.6% fewer than in August 2018.

Swiss retail sales volume recorded their third monthly decline in four months and were 1.4% lower than a year earlier in August. That’s the biggest 12-month drop in 11 months.

Britain’s Nationwide house price index was only 0.2% higher in September than a year earlier, which is the smallest 12-month rise in eight months.

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

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