Dollar Rebound Continues While Equities Remain Exposed

October 29, 2020

There’s much to digest today: monetary policy reviews in Japan and Euroland, a first glimpse of U.S. 3Q growth, Covid lockdowns in France and Germany, and latest U.S. political developments as election campaign enters final days.

The dollar strengthened overnight by another 1.4% versus the peso, 1.3% against the Australian dollar, 0.8% relative to the kiwi and sterling, 0.7% vis-a-vis the euro and loonie and 0.4% against the Swiss franc. The Japanese yen, which also has safe-haven properties, eked out a 0.1% uptick against the dollar as the Bank of Japan left all monetary settings unchanged.

In stock markets around the Pacific Rim, share prices lost 1.6% in Australia, 1.0% in Taiwan, 0.8% in South Korea, 0.5% in Hong Kong, and 0.4% in Japan and India. Spain’s IBEX and the Paris Cac so far show drops of 1.3% and 0.3% on the day. U.S. futures attempted an early rebound from Wednesday’s sell-off but are now looking heavy.

Ten-year U.S. and Japanese sovereign debt yields are a basis point firmer, while the 10-year German bund yield slid a basis point.

Hurricane Zeta made landfall yesterday in Louisiana, and the price of West Texas Intermediate crude oil dropped another 3.6% overnight, bring its total loss since before last weekend to 9.5%. Gold is little changed but below $1880 per ounce for the first time in a month.

This month’s Bank of Japan Board meeting coincided with the release of its quarterly Outlook for Economic Activity and Prices. Targeted interest rates of -0.1% on overnight money rates and “around 0%” on the 10-year JGB yield since September 2016 were again not changed, nor did officials elect to modify any other policy settings, according to the separate statement on monetary policy. The primacy of promoting 2% CPI inflation in the medium term has been displaced for the time being by the more pressing urgency of countering the negative economic impact of the Covid-19 pandemic. A projected 4.7% drop at the time of the July meeting in GDP this fiscal year has been revised larger to negative 5.5%, and specific concern is now being expressed that the lingering fallout of Covid might squeeze bank profit margins and damage financial market functionality. The new baseline growth forecast calls for GDP to revive 3.6% next fiscal year but just 1.6% in fiscal 2022-23, plus growth risk remains skewed to the downside. Regarding inflation, officials now project consumer prices dropping 0.6% this fiscal year and then edging up 0.3% in FY21/22 and 0.7% in FY22/23. Officials upgraded their view on exports, but corporate investment and personal consumption continue to look problematic. Inflation expectations are very subdued.

The Central Bank of Brazil’s key Selic interest rate has been left at 2.0% after the latest review of monetary policy. Four reductions implemented from February to August totaled 250 basis points. Brazilian inflation is currently below target but expected to rise. The decision not to change policy was made unanimously.

Japanese retail sales and consumer confidence figures released today underscore the softness of the household sector. Sales dipped 0.1% on month in September, resulting in an 8.7% 12-month rate of decline, which is a full percentage point greater than anticipated. Although rising 0.9 index points to an 8-month high, October consumer confidence reading of 33.6 remains quite pessimistic.

Euroland’s October economic sentiment index did not extend the recent improvement from pandemic lows but rather only matched September’s 6-month high of 90.9. The result was depressed by two-month and 5-month lows in the services sector and consumer confidence. Moreover, the two largest economies using the euro — Germany and France — have just been forced to reimpose 1-month lockdowns in non-essential services.

Covid-19 news in the United States has also been worrisome. Over the past 24 hours, there have been more than 80k newly reported cases and over a thousand Covid deaths in the U.S..

New Zealand business confidence in October improved to its best level of 2020.

In Italy, overall economic sentiment and confidence among manufacturers improved further in October to their best levels since before the pandemic, but consumer sentiment dropped back 1.3 index points to a 2-month low.

Dutch business confidence fell 0.8 index points to a 3-month low of -5.6 this month. Danish business sentiment, by contrast, rose to a 3-month high but still sub-zero score of -7.

Austrian business confidence in October rose further to a 7-month high but was accompanied by news of a 5-month low in Austrian consumer confidence.

South Korean business confidence improved two index points to a reading of 68 in August, which was the best score in two years and four months.

Producer prices in Spain were 0.9% lower than a year earlier in October, their greatest 12-month drop in five months and the seventh deflationary result in a row.

Icelandic CPI inflation increased 0.1 percentage point to a 2-month high of 3.6% in October. Belgian CPI inflation rose 0.1 percentage point as well to 0.9% in September.

Belgian third-quarter GDP bounced up 10.7% last quarter after dropping 3.5% in 1Q and 11.8% in 2Q. GDP remained 5.2% below its year-earlier level.

PPI inflation in South Africa, which had bottomed at 0.4% in May, accelerated another 0.1 percentage point to a 6-month high of 2.5% in September.

A 10.5% year-on-year plunge in Singapore producer prices in September was the most in 21 months.

German harmonized unemployment in October matched September’s 57-month high of 4.5% and was 1.4 percentage points greater than in October 2019.

Between the third quarters of 2019 and 2020, Australian export prices (down 9.9%) fell much more sharply than import prices (-3.7%).

U.S. real GDP rebounded on quarter at a 33.1% annualized rate in 3Q after dropping 5.0% in 1Q and then diving 31.4% in the second quarter. All this volatility lefter GDP 2.9% lower than in the third quarter of 2019. The lack of continuing fiscal stimulus was evident in a 4.5% slide in government expenditures (-6.8% compared to a year earlier). Net foreign demand exerted a 3.1 percentage point drag on the third-quarter GDP growth rate, and a 6.6 percentage point boost from inventories is another unsettling element from a forward-looking perspective. The total personal consumption price deflator and core PCE deflator were respectively 1.2% and 1.4% above their year-earlier levels. There’s still quite a way to go before Fed officials will be satisfied with the state of inflation.

Just in: The ECB Governing Council did not change policy settings, nor was a change expected by street analysts. The deposit rate has been -0.5% since September 2019, and the size of the PEPP program of pandemic support was lifted to 1.35 trillion euros last June and will remain at least through next June. Regular asset purchases will be maintained at a pace of 20 billion euros per month and not end until shortly before the first increase in interest rates. Euroland’s recovery has lost momentum, and inflation is currently negative. “Risks surrounding the euro area growth outlook are clearly tilted to the downside.” Updated macroeconomic forecasts due in December will guide what is done then. Risks continue to be tilted to the downside in the region because of the pandemic.

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


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