Equities Fall Even as Central Banks Commit to Maintaining Low Interest Rates

September 17, 2020

Share prices in Asia closed down 1.6% in Hong Kong, 1.2% in South Korea, 0.8% in Taiwan and India, 0.7% in Japan and 0.4% in China and Indonesia. Equities in Europe so far today have dropped 1.2% in Italy, 0.9% in France, 0.8% in Germany and Spain, and 0.5% in the U.K..

The dollar recovered 0.6% against sterling, which was depressed by a dovish Bank of England policy statement. The Monetary Policy Committee unanimously agreed to maintain its 0.10% base rate and its expansionary asset purchase programs. “The Committee does not intend to tighten monetary policy until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably,” and is not ruling out even more stimulus including a negative interest rate. The base rate was at 0.75% prior to the pandemic but was cut twice in March, first by 50 basis points and a week later by another 15 bps to its current level. Officials identify several downside economic risks: a rise in Covid-19 cases, failure to secure a trade deal with the EU, and the pending end of fiscal support to counter job layoffs.

The dollar fell 0.4% overnight against the yen. The Bank of Japan‘s scheduled policy review by an 8-1 vote retained all policy settings: a negative 0.1% short-term interest rate, a 10-year JGB target of around zero percent, ample asset purchases, and other unconventional measures to maintain financial market stability and support corporate funding. As before, Kataoka dissented in favor of augmenting quantitative stimulus and lower interest rates. The policy board, however, upgraded its economic assessment from an “extremely severe state” to “remaining in a severe state but starting to recover.” Governor Kuroda in the subsequent press conference reaffirmed a commitment to augment policy stimulus if needed. Inflation in the near term is projected to slide below zero percent, but the medium-term outlook still sees such returning to positive ground and rising gradually toward the 2% target. Like the Fed, BOJ officials envisage inflation hovering above target for a while in order to re-anchor inflation expectations, which have sagged lately.

The dollar otherwise was narrowly mixed overnight. Ten-year sovereign debt yields declined by five basis points in the U.K. and U.S. and by 2 basis points in Germany.

The prices of gold and WTI oil are 0.9% and 0.2% lower.

In addition to the BOJ and Bank of England, monetary policies were reviewed today in several other countries.

At the Central Bank of Brazil, the Selic interest rate was kept steady at the record low of 2.0%, which is 250 basis points below its level prior to the pandemic. Rate cuts were authorized in February, March, May, June and August. A released statement today observes a partial recovery in Brazil’s economy but cautions that “uncertainty about economic growth remains larger than usual, especially for the period starting at the end of this year, concurrently with the expected unwinding of the emergency transfer programs.” Scope for more monetary stimulus is limited: “remaining space for monetary policy stimulus, if it exists, should be small. Consequently, possible future adjustments to the current degree of monetary stimulus would occur with additional gradualism and would depend on the perception of the fiscal trajectory, as well as on new information that changes the Committee’s current assessment about prospective inflation.”

Officials at the Central Bank of the Republic of China (Taiwan) held a quarterly policy review and decided to unanimously maintain a 1.125% discount rate. Earlier this year, there had been one 25-basis point cut done in March. A released statement notes elevated uncertainty associated with future economic trends and reaffirms the commitment to intervene if necessary in foreign exchange markets in order to keep trading conditions orderly.

As with the aforementioned central banks and the Fed yesterday, today’s Board of Governors meeting at Bank Indonesia kept its 7-day reverse repo rate unchanged at 4.0%. This had been the expected outcome after four 25-basis point reductions earlier this year engineered in February, May, June and July. Indonesian monetary officials have also cut bank reserve requirements and conducted quantitative market support through its asset purchases. The desire to counteract the pandemic’s drag on the economy needs to be tempered because of the downside risk to the rupiah, which already this year has depreciated more than 6% against the dollar.

Released U.S. economic data today showed

  • 860k new jobless insurance claims nationwide, which is a tad more than had been forecast but slightly below the prior week’s total. Claims have plateaued recently at a level more than four times the rate prior to the pandemic.
  • The Philadelphia Fed manufacturing index printed at 15 in September, down from 17.2 in August and marking the third consecutive month-to-month decline.
  • Housing starts and building permits respectively fell 5.1% and 0.9% in August.
  • According to the monthly Treasury Department compilation of capital flows into and out of the country, the net long-term inflow dropped very sharply in July to $10.8 billion, and there was a third straight and larger total net outflow of $88.7 billion.

Consumer price inflation in the euro area turned negative in August (-0.2%) for the first time in 51 months. A year earlier in August 2019, CPI inflation was 1.0%. The main deflationary impulse last month was concentrated in non-energy industrial goods, whose price dropped 1.6% on month.

Construction output in Euroland edged just 0.2% higher in July following a 12% plunge in the second quarter. This left construction production 3.8% below its year-earlier level. New car registrations in the European Union were 18.9% fewer than a year earlier.

The Swiss trade surplus of CHF 3.414 billion in August was the second widest in the past year. The January-August surplus of CHF 23.4 billion was 47% wider than a year earlier.

Real GDP in New Zealand sank 12.8% last quarter and was 12.4% below its year-earlier level.

Australia’s jobless rate had been projected to rise in August but instead fell to a 4-month low of 6.8% from 7.5% in July. Employment climbed 111k last month, but two-thirds of that increase involved part-time workers.

Consumer prices between August 2019 and August 2020 fell by 5.0% in Portugal and 1.2% in Cyprus.

Unemployment in Hong Kong held steady at 6.1% in August. That close to a 15-year high and up from 2.9% last September.

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

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