Soft Economic Data and China Balking on a Long-Term Trade Deal

October 31, 2019

Equity markets today are down 1.1% in India, 0.9% in the U.K., and 0.4% in China and Australia. 10-year sovereign debt yields also reflect a more cautious investor mood. Canada’s 10-year yield tumbled 15 basis points on Wednesday. Today, the 10-year German bund and British gilt yields are down 5 bps, and the U.S. Treasury yields has slipped four basis points. Oil has sunk 1.3%, while gold is showing its safe-haven color with a 1.0% advance. The dollar declined overnight by 0.6% against the yen and kiwi, 0.4% relative to sterling, 0.3% versus the Swiss franc and 0.2% against the yuan. The euro has moved lower in tandem with the dollar.

The flip-flopping mood of investors was depressed this Halloween by reports that Chinese officials are reluctant to strike a long-term trade deal with President Trump due to the U.S. newfound propensity to break promises on all sorts of agreements. Trump and Xi had been scheduled to hold talks at next month’s APEC conference, but that summit has been cancelled due to civil disturbances in the host country of Chile. Meantime, a lot of economic data were reported as happens on the final business day of each month, and much of such were weak.

Following monthly declines of 0.8% in July and 0.1% in August, the volume of German retail sales only edged 0.1% higher in September, trimming their 12-month increase to a 4-month low.

British consumer confidence in October dropped two index points to -14, which matches 6-year lows also observed last January and August.

Japanese consumer confidence in October recovered 0.6 points but, aside from a 99-month low in September of 35.6, was the weakest this year. Over the 12 months through September, Japanese construction orders, housing starts, and motor vehicle production respectively fell by 6.8%, 4.9% and 2.2%. Despite a 1.4% rise of industrial production in September following a 1.2% drop in August, output decline 0.6% in the third quarter and was 0.9% weaker than a year earlier. Officials retained a trend designation for industrial output of “has a weak tone recently.”

The Chinese statistical agency NBS reported a 1.1-point drop to 52.0 in that economy’s composite purchasing managers index. The manufacturing index stayed below the 50 line of neutrality for a sixth straight time and was the weakest since April. The non-manufacturing PMI declined to a 44-month low of 52.8.

CPI inflation in the euro area slid 0.1 percentage point (ppt) to a 37-month low of 0.7% due mainly to a bigger on-year slide in the energy component. Core inflation rose 0.1 ppt to 1.1%.

Although Euroland’s unemployment rate stayed at 7.5% in September, marking the third such result in four months and otherwise the lowest jobless pace since July 2008, unemployment among workers younger than 25 increased 0.2 percentage points to 15.9%.

U.S. real personal spending rose only 0.2% in September. Nominal income growth slowed, and inflation according to the total and core PCE price deflators dipped 0.1 percentage point to 1.3% and 1.7%, respectively.

U.S. jobless insurance claims last week (218k) were 5k greater than in the prior week. The U.S. employment cost index increased 0.7% in the third quarter, but its on-year growth of 2.8% remained below the 3% psychological threshold and matched its rise in the prior four quarters through 3Q18.

On-year growth in Italian consumer prices in October of just 0.3% matched September’s 34-month low, and core inflation was below 1.0% as well. French CPI inflation in October of 0.7% fell to a 27-month low, and Portuguese consumer prices this month were unchanged from a year earlier.

Spanish GDP increased by an as expected 0.4% on quarter and 2.0% on year in the summer quadrant.

Australian import price inflation slowed to 1.2% last quarter from 2.8% in 2Q19.

The impact of trade tensions and domestic strife on Hong Kong‘s economy was reflected in a 3.2% slide of GDP last quarter. Negative on-year growth in the former British colony of -2.9% occurred for the first time since the Great Recession.

Industrial production in South Korea was just 0.4% higher than a year earlier in September.

Over the last three reported months, Canadian GDP measured from the supply side rose 0.1% in June, remained flat in July and again edged up 0.1% in August. GDP recorded on-year growth of just 1.3% in August, and industrial production in that span fell by 1.3%. A separate Canadian release revealed a deeper 1.3% on-year slide in producer prices in September.

The Bank of Japan’s latest policy review, a meeting lasting five hours and 18 minutes over two days, produced no change in policy settings: a negative 0.1% short-term policy interest rate, a targeted 10-year JGB yield of “around zero percent,” and plans to buy about JPY 80 tln of JGB’s annually. This month’s policy review was accompanied by publication of the quarterly Outlook for Economic Activity and Prices. As was the case in earlier policy reviews, two of the nine Policy Board members (Harada and Kataoka) wanted more stimulus.

In the released documents and Governor Kuroda’s post-meeting press conference, policymakers attempted to convey a growing perceived possibility that the Board may be compelled to ease policy further at a future meeting.

  • Policy guidance was conveyed with somewhat different wording: “Although there had
    been no further increase in the possibility that the momentum toward achieving the price stability target would be lost, it was necessary to continue to pay close attention to the possibility… In a situation where downside risks to economic activity and prices, mainly regarding developments in overseas economies, are significant, the Bank will not hesitate to take additional easing measures if there is a greater possibility that the momentum toward achieving the price stability target will be lost.”
  • Projected growth was revised lower to 0.6% this fiscal year, 0.7% in fiscal 2020 and 1.0% in fiscal 2011. Likewise, core inflation excluding the impact of this month’s sales tax hike was revised downward to 0.5% this year, 1.0% next fiscal year and 1.5% in fiscal 2021.
  • It was reaffirmed that officials in fact will not be satisfied merely if core inflation touches the 2% goal. The intention is to have an interval of sufficient length with core inflation above the target for officials to be satisfied that 2% is the new norm embodied in both actual and expected inflation.
  • Greater worry was expressed that a prolonged inflation undershoot could cause medium- and long-term inflation expectations to become unhinged in a downward manner.
  • Governor Kuroda attempted to dispel concerns that the central bank’s tools to combat any future renews slide in actual or expected inflation. He asserted that the BOJ has many options to address such a development.

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

Tags: , , , ,


Comments are closed.