Risk Back On

November 7, 2019

A claim was made by a Chinese Commerce Ministry spokesman that the U.S. and China have agreed to a phased and mutual reduction of trade deficits but only contingent on a trade deal being done. Stock markets are up 0.7% in Germany, 1.0% in Australia, 0.7% in Singapore, 0.6% in Hong Kong, 0.5% in India, and 0.4% in the U.K.. U.S. equity futures point to a higher open, but stocks in Japan and China barely moved overnight.

With investors shifting out of fixed income securities, 10-year sovereign debt yields rose overnight by 8 basis points in Italy, 6 bps in the Netherlands, 4 bps in Switzerland, 2 bps in the U.K., 1 basis point in Japan, and 5 basis points in Germany, Spain and U.S. Treasury futures.

The price of West Texas Intermediate crude oil climbed 1.3%.

Normally a safe haven among currencies, the dollar fell today so far by 0.3% against the yuan and 0.1% relative to the euro, Swiss franc, and peso. Alternatively, the dollar rose 0.2% versus the yen, another safe haven and 0.3% relative to sterling. Gold fell 0.5%.

Sterling’s slide reflects one of the days biggest surprises. While the Bank of England Monetary Policy Committee left unchanged existing stocks of corporate bond purchases, U.K. gilt purchases, and the 0.75% bank rate, the vote by the 9-person committee on the interest rate level drew dissents favoring a cut by Michael Saunders and Jonathan Haskel. As officials have done all along, forward guidance allows for two-sided risk because of uncertainties like the details of a Brexit deal and, more importantly, a lack of clarity regarding how the economy will respond to whatever evolves on Brexit. The committee’s statement notes that odds have improved against a no-deal Brexit and states that if downside economic risks do not materialize, “some modest tightening of policy at a gradual pace and to a limited extend may be needed” in the latter half of the forecast horizon. A new quarterly Monetary Policy Report accompanied this statement that concedes that the slowdown of growth this year has created a modest excess supply in the economy. CPI inflation is projected to accelerate 0.1 percentage point to 1.5% a year from now, 2.0% in late 2021 and 2.2%, that is above target, by late 2022.

The Czech National Bank also announced no change in its key policy rate, the 2-week repo which remains at 2.0%.

However, the National Bank of Serbia’s executive board did make a change in its policy rate, cutting such by 25 basis points to 2.25%. This is the third such cut since July. A statement of explanation cites weakening inflationary pressure and the easing actions of other central banks but asserts that Serbian domestic macroeconomic indicators continue to trace favorable trends.

In the Autumn EU Commission forecast, projected Euroland GDP growth in 2019 was revised downward to 1.1% and put at only 1.2% next year and 1.4% in 2021. Officials expect inflation to continue undershooting target by a significant margin with predicted CPI rises of 1.2% next year and 1.3% in 2021, and they urge more fiscal support especially from the Netherlands and Germany.

German industrial production dropped 0.6% in October, somewhat more sharply than expected and resulting in a bigger 4.3% decline from a year earlier. It was the third month-on-month decline in the last four months.

Global service sector and composite purchasing manager indices compiled by JPMorgan fell in October to 43- and 44-month lows but remained modestly above the 50 no change level.

Euroland’s construction purchasing managers index┬árose 0.2 index points to a 4-month high of 50.7. The improvement was led by Germany, where the construction PMI reached a 6-month high. But the construction PMIs of France (50.5) and Italy (50.1) were at 5- and 2-month lows in October.

Australia’s construction PMI rebounded 0.7 points to a 2-month high but remained below 50 with an October reading of 43.9.

News of a 45-month high of 48.3 in Lebanon’s private purchasing managers index is misleading. Due to paralyzing street protests there, the data couldn’t be gathered past the 17th of last month. Conditions now are much worse.

The Halifax index of British house prices dipped 0.1% on month and posted the smallest on-year increase (0.9%) in nine months.

Business confidence in South Africa slid to a two-month low in October and was the second weakest month since March.

Australia’s January-September trade surplus of A$ 54.36 billion was almost four times wider than in the equivalent period of 2018.

In Latin America, Mexican CPI inflation of 3.0% in October met expectations. Brazilian CPI inflation that month of 2.5% was less than analysts anticipated. Peru’s central bank will reveal its latest interest rate decision later today.

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


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