Risk Preference Restored to Some Extent

February 19, 2020

EUR/USD is unchanged from yesterday’s closing level. The dollar is also flat against the yuan and kiwi, up most strongly versus the yen (0.8%) and then 0.3% relative to sterling. To the surprise of few, Prime Minister Boris Johnson is not proving to be as adept at governance as he was at running for election.

Share prices rebounded 0.9% in Japan and Taiwan, 0.7% in Indonesia, 0.6% in New Zealand and Singapore, 0.5% in Hong Kong and 0.4% in Australia. China’s market, in contrast, slid o.3%. Key European stock markets show gains from 0.5% to 0.8%, and the U.S. opened on a modest up-note.

Among key commodities, the prices of WTI oil and Comex gold are 1.6% and 0.2% higher.

Ten-year U.S. Treasury and Japanese JGB yields climbed a basis point, while their British and German counterparts are steady.

Minutes from the late-January FOMC meeting will be published later today. Of special interest is whether fresh information helps clarifies the committee’s intentions regarding expansion of the Federal Reserve spreadsheet and member thoughts about the coronavirus outbreak.

In the meantime, markets have had a chance to digest several released U.S. indicators.

  • Housing starts settled back 3.6% in January from December’s 13-year high and stayed a hefty 21.4% greater than a year earlier. Building permits leaped 9.2% further and were 17.9% above their January 2019 level. These developments provide some reassurance to a second straight dip in the National Association of Home Builders housing market index to a 3-month low in February. At 74, that index was still 10 index points above its mid-2019 level.
  • Producer prices jumped 0.5% in January, easily beating analyst expectations, and lifting their 12-month rate of increase to an 8-month high of 2.1%. Producer prices for goods only edged 0.1% higher, but serves went up 0.7%. Core PPI inflation, which excludes food and energy, accelerated 0.6 percentage points to 1.7%, But inflation according to the PPI index that excludes trade effects as well as food and energy stayed level at 1.5%.
  • The continuing buoyancy of the dollar was reflected in Treasury-compiled capital flow data for December and full-2019. Net long-term inflows totaled $85.6 billion in December and $384.8 billion for the year, while all measured long-term and short-term capital flows generated a net inflow of $78.2 billion in the month.

The Central Bank of Turkey engineered its sixth and most “measured” cut of the one-week repo rate of an easing cycle that began last July. From August 2018 until then, the rate had been kept at a stratospheric 24%, and 13.25 percentage points above the new rate level of 10.75%, which happens to be represent a 21-month low. A released statement from Turkey’s Monetary Policy Committee observes an improving inflation outlook and current account situation, some signs of recovery in activity, but continuing weak trends in business investment and jobs. “The Committee assesses that maintaining a sustained disinflation process is a key factor for achieving lower sovereign risk, lower long-term interest rates, and stronger economic recovery. Keeping the disinflation process in track with the targeted path requires the continuation of a cautious monetary stance.”

Today’s nearly 1% decline of the yen followed some disappointing Japanese economic news.

  • Core private domestic orders for machinery slumped by 12.5% in December, 2.1% in the fourth quarter and 3.1% in the quarter before that. Orders from the public sector plunged 23.3% in December and 11.5% last quarter, and export orders dropped 7.0% in the quarter despite a 2.4% rebound in December. In year-on-year comparisons for December, core private domestic orders fell 3.5%, while orders from the government and foreigners dived by 15.7% and 18.0%.
  • Japan recorded a somewhat larger JPY 224 billion seasonally adjusted trade deficit in January than the JPY 107 billion gap in December. Exports and imports recorded monthly declines of 3.7% and 1.8% and on-year drops of 2.6% in exports and 3.6% in imports.

British CPI inflation increased half a percentage point to a 6-month high of 1.8% last month. Core CPI inflation of 1.6% also surpassed analyst forecasts. Producer output inflation rose 0.2 percentage points to 1.1% but was associated with a 0.2-percentage point drop in PPI-O core inflation to 0.7%. Producer input inflation last month rose a bit to 1.1%, and the former DCLG house price index for December recorded a larger 12-month increase of 2.2%, which embodied increases from all major regions for the first time in 22 months.

Euroland’s non-seasonally adjusted current account surplus of EUR 51.2 billion in December was the largest ever. A surplus of EUR 356.4 billion in 2019 equaled 3.0% of GDP, 0.1 percentage point less than the relative size of the 2018 surplus. Italy experienced a EUR 53.35 billion surplus in 2019, 16.3% wider than in 2018.

Construction output in the euro area plunged 3.1% in December and fell 0.9% last quarter. December’s on-year decline of 3.7% was the biggest such drop in 35 months. Construction has fallen three straight quarters. In the first quarter of 2019, construction had been 4.7% greater than in 1Q18.

Portuguese producer prices rose for the first time in eight months during January, albeit by just 0.1%, resulting in the smallest on-year decline (1.9%) since September. Energy costs increased sharply.

Australia’s quarterly wage price index recorded increases last quarter of 0.5% from 3Q and 2.2% from a year earlier, matching market expectations. The Westpac index of Australian leading economic indicators rose by 0.05% in January, less than in December but the same gain as in November.

Canadian CPI inflation in January of 2.4% was up from 2.2% in the final two months of 2019 and the most since May. The three measures of core inflation preferred by Bank of Canada officials ranged from 1.8% to 2.2%, thus straddling the target. But Canadian growth has been underperforming.

The good coronavirus news is that Chinese hospital discharges have exceeded new cases. The bad news that deaths in China now exceed 2,000 and that the virus spread outside of China seems to be accelerating means that this is no time to be complacent about this known unknown.

Copyright 2020, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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