Greater Pessimism Surrounding Brexit, U.S.-China, and Global Growth

October 16, 2019

Investor confidence regarding the main geopolitical risks of Brexit and U.S.-Sino trade continue to flip-flop seemingly on a daily basis, often without any concrete new actions.

Still no deal on Brexit has been announced with the main sticking point being the handling of Northern Ireland’s border with Ireland, and time is getting exceedingly short.

Trade relations between the United States and China have been imperiled further after the U.S. House of Representatives unanimously approved a Hong Kong bill regarding human rights and democracy in the former British colony. China’s government has threatened a retaliatory response if the Senate approves the bill and it is approved by President Trump.

Dollar movements overnight range from declines of 0.3% against the Swiss franc, 0.2% versus the yen and 0.1% vis-a-vis the euro to appreciations of 0.6% against the kiwi, 0.4% relative to the Australian dollar and 0.2% versus the yuan and loonie. The dollar shows no net change against sterling or the peso.

Share prices climbed 1.3% in Australian and New Zealand, 1.2% in Japan, 0.7% in South Korea, 0.6% in Hong Kong and Singapore. Equities are down 0.4% in China and the U.K. and 0.3% in Switzerland. Alternatively, the stock markets of Italy and Germany are so far up 0.3%.

In commodities trading, gold and oil prices firmed 0.5% and 0.3%.

The ten year U.S. Treasury and British gilt yieldsBrĀ dipped 3 and 1 basis points, while their German and Japanese counterparts edged a basis point higher.

In central bank news, the Bank of Korea enacted its second 25-basis point repo rate cut since July and released a statement that suggests more ease may be done. But with two of seven policymakers dissenting in favor of not cutting the main interest rate today, the timing and certainty of a third move has been thrown into some doubt. At 1.25%, the rate level is back to a record low initially experienced from June 2016 to November 2017, and it is only half as high as it was just prior to March 2014. The statement explaining today’s policy easing, which had been anticipated, concedes that growth and inflation looking ahead are likely to be lower than assumed previously and promises to “judge whether to adjust the degree of monetary policy accommodation, while observing any changes in macroeconomic and financial stability conditions and the effects of the two Base Rate cuts. It will also carefully monitor the US-China trade dispute, any changes in the economies and monetary policies of major countries, the trend of increase in household debt, and geopolitical risks.”

Today’s major news from a data release was an unexpected decline in U.S. retail sales by 0.3% last month. It’s undershoot of street expectations more than offset an upward 0.2 percentage point revision of August retail sales growth. Up to now, resilient consumer spending and confidence in the United States have offset disappointing trends in exports and business investment. Growth forecasts for the coming year depend crucially on consumption chugging along.

There have also been released several price reports, accentuating global disinflation despite monetary accommodation.

  • CPI inflation in the euro area was revised down 0.1 percentage point to 0.8% in September, which is a 34-month low. Core inflation stood at 1.0%, and the energy component posted a 1.8% 12-month decline versus a 9.6% rise in the prior year through September 2018.
  • British CPI inflation last month matched August’s 1.7% 32-month low. Producer output price inflation fell half a percentage point to a 3-year low of 1.2%, and a 2.8% decline in producer input prices was the largest on-year slide in 37 months.
  • Italian consumer prices dropped 0.6% on month, trimming the on-year inflation rate to a 33-month low of 0.3%.
  • Czech producer price inflation eased 0.2 percentage points in September to a 16-month low of 1.9%.
  • Austrian CPI inflation in September was 0.3 percentage points less than in August at a 3-month low of 1.2%.
  • On-year consumer price inflation in New Zealand declined back to a 2-quarter low of 1.5% in the third quarter and is down from 1.9% in the second half of 2018.
  • Canadian CPI inflation hovered below the 2% target at 1.9% in both August and September.

In other data reported today, the monthly U.S. National Association of Home Builders housing market index improved three index points to a 20-month high of 71 in October.

Euroland’s seasonally adjusted trade surplus widened EUR 2.8 billion to EUR 20.3 billion in August mainly on a drop in imports. Such was the widest surplus in at least a year. The accumulated unadjusted surplus so far this year of EUR 139 billion was EUR 7 billion greater than seen in the first eight months of 2018.

Industrial orders in Italy were 10% fewer in August than a year earlier. That was the biggest on-year drop in 37 months.

British and European Union new car registrations, a gauge of sales, were 13.4% and 15.4% greater in September than a year earlier.

The British government’s house price index rose 1.3% in the 12 months through August.

Retail sales in South Africa fell 0.9% in August, its greatest monthly drop in 8 months, which trimmed the year-on-year rise almost in half to a 5-month low of 1.1%.

South Korean unemployment of 3.4% in September was lower than forecast but higher than August’s 3.1%. South Korean import prices were 5.6% below year-earlier levels in September.

Mexico’s index of leading economic indicators slumped 1.5% in August after showing no change in July.

The European Council, consisting of EU political leaders, begins a crucial summit today in Brussels.

Still ahead: The Fed Beige Book of regional trends and U.S. Treasury-compiled capital flows (TIC) will be released.

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

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