Yuan Strengthens and Iran Financial Market Impact Lessens

January 7, 2020

The Chinese yuan is up 0.5% against the dollar, its biggest daily advance in just over a half year. A Phase I Sino-U.S. deal is expected to be signed soon. The approaching Lunar New Year holiday is driving demand for cash in China.

More than 30 people died and many more were injured in a stampede at Suleimani’s funeral in Iran, and the government there reaffirmed its pledge to exact revenge on the United States. However, financial markets have become less unnerved by this risk.

Share prices in the Pacific Rim closed up 1.6% in Japan, 1.4% in Australia and 1.0% in South Korea. In Europe, equities have thus far risen today by 0.9% in Germany, 0.6% in Italy, and 0.5% in Switzerland.

10-year sovereign debt yields rose a basis point in the U.K. and Japan. The 10-year U.S. Treasury yield slid just one basis point, and the German bund is steady.

West Texas Intermediate crude oil settled back 0.9%, and the price of gold is generally steady.

The dollar firmed 0.5% versus the kiwi, 0.4% against sterling, 0.3% relative to the Swiss franc, 0.2% vis-a-vis the euro and loonie and 0.1% against the yen.

Retail sales volume in Euroland jumped 1.0% in November, the largest monthly advance since July. Sales were 2.2% greater than a year earlier.

Consumer price inflation in the euro area accelerated to 1.3% in December from 1.0% in November and 0.7% in October. The end-2018 inflation rate had been 1.5%. Energy prices were higher than a year earlier for the first month since July. Core CPI remained at November’s 1.3% but exceeded the end-2018 level of 0.9%. Much of the rise compared to December 2018 was concentrated in the Netherlands, which saw inflation climb to 2.8% from 1.8%. Between end-2018 and end-2019, inflation decelerated in Germany, France, Italy, Spain, Belgium, Cyprus, Finland and Portugal, by contrast.

Swiss consumer prices were flat in December and have failed to post a monthly increase since May. On-year Swiss inflation of 0.2% was positive for the first time since September.

Italian CPI inflation of 0.5% last month marked a 6-month high, and Polish CPI inflation of 3.4% was the most since October 2014. Austrian wholesale price inflation of -0.4% in December was the least negative since July.

Spanish consumer confidence rose marginally in December for a second straight month, but the improvement was smaller than that in November, and the December reading of 77.7 was still well below last June’s level of 102.3.

December construction purchasing manager indices among the three largest economies using the euro printed at 9- and 3-month highs in Germany and France but at a 21-month low of 47.7 in Italy. The pan-Euroland construction PMI increased 0.7 points to an 8-month high of 51.3.

Japan’s composite purchasing managers index sank 1.2 points to a 68-month low of 48.6, implying a contraction. Economists were surprised to learn that the service sector PMI had fallen below the 50 level that separates improvement from deterioration. Yesterday’s release of Japan’s manufacturing PMI had printed at 48.4.

On-year growth in Japan’s monetary base, the aggregate over which the Bank of Japan exerts most direct control, decelerated to 3.2% in the second half of 2019 from 4.0% in the first half, 7.3% in 2018, and 17.0% in 2017. The central bank’s balance sheet expanded just 3.8% between end-2018 and end-2019 after having mushroomed by 236% from the onset of Abenomics in April 2013 through end-2018. Several of the monetary policymakers are worried that the ultra-loose monetary stance is exerting irreversible damage on Japan’s financial system.

On-year growth Indian real GDP slowed to a 26-quarter low of 4.5% in the third quarter of 2019 from 5.0% in the second quarter, 7.0% in the third quarter of 2018 and 8.0% in last year’s second quarter.

Chinese foreign exchange reserves rose $12.3 billion in December, almost twice analyst forecasts, to $3.108 trillion.

The global composite purchasing managers index, compiled by JP Morgan, rose 0.3 points to an 8-month high in December of 51.7.

Lebanon’s private PMI bounced from a record low of 37.0 in November to a 2-month high of 45.1 in December, but that rise preceded the escalation of tensions between Iran and the United States that now has the whole Middle East on high alert.

South Korea’s current account surplus in November of $5.97 billion was 16% wider than a year earlier, but the January-November surplus of $55.64 billion was still about $17 billion smaller than that in the first 11 months of 2018.

Indonesian consumer confidence improved to a 6-month high in December, and CPI inflation in Taiwan of 1.1% last month signified a 14-month high.

The U.S. goods and services trade deficit shrank in November for a third straight month. At $43.086 billion, such was $10.5 billion narrower than August’s imbalance and 19.7% smaller than a year earlier. The deficit had averaged $52 billion per month in January-October. November’s deficit was the smallest since a month before Donald Trump was elected president.

Canada also reported a better trade position. That country’s deficit declined from C$ 1.607 billion in October to a 5-month low of C$ 1.089 billion in November. There had been an isolated $C300 million surplus last May preceded by a string of deficits in earlier months.

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

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