Lower Bond Yields, Mixed Dollar and Softer Equities in Face of Relentless Covid

November 12, 2020

Covid cases in the last 24 hours exceeded 600k and 140k globally and in the United States. Global and U.S. deaths from the illness over the past two days averaged more than 10k and 1.45k per day. While vaccine development seems to be making good progress, a new worry is that Covid’s ability to mutate will constrain the long-term effectiveness of vaccines, pushing any return to pre-pandemic normalcy further and further into the future.

On the U.S. election front, no sign has emerged of Trump and the Republican Party giving up on their quest to change the outcome in the courts. President-Elect Biden named Ron Klain his chief of staff, and the two Georgian senatorial elections in January loom enormously.

Share prices in Europe are down more than 1.0% today in Germany, France, Italy and Spain as well as 0.8% in Great Britain. Markets closed down 0.9% in Indonesia, 0.8% in Hong Kong and 0.5% in Taiwan and Australia but also rose 0.7% in Japan.

The dollar overnight advanced 0.6% against sterling, 0.4% in versus the Mexican peso, 0.3% relative to the Australian dollar and 0.2% vis-a-vis the loonie and kiwi, but the greenback slipped 0.2% against the euro and 0.1% versus the yen, Swiss franc, and Chinese yuan.

Ten-year sovereign debt yields dropped four basis points in the United States, three bps in Great Britain, and a basis point in Germany and Japan. The prices of WTI oil and gold changed little on balance overnight.

More meaningful economic data were released today than earlier this week. These reports included a lower-than-forecast 1.2% rate of U.S. CPI inflation in October, which is a three-month low. Core inflation of 1.6% was also the lowest since July. New U.S. jobless insurance claims fell last week by 48k but, at 709k, remained close to the highest levels hit during the Great Recession.

Industrial production in the euro area dropped 0.4% in September, fooling analysts who had anticipated a rise of at least 0.5%. Output was 6.8% lower than a year earlier, similar to the 12-month declines of 6.7% in August and 6.8% in July. Europe’s economic recovery is now fighting against the headwinds of Covid’s second wave. Whereas production in German and France each recorded monthly advances of at least 1.5%, production fell 5.6% in Italy and 6.4% in the Netherlands.

British real GDP recovered 15.5% last quarter but remained 9.6% weaker than a year earlier. Monthly GDP in September was still 8.2% below the pre-pandemic level last February. The British goods and services trade surplus narrowed to a 6-month low of GBP 613 million in September, and the goods-only trade deficit of GBP 9.348 billion that month was the largest in six months. Industrial production in the U.K. rose by less in September (0.5%) than had been forecast and was 5.6% weaker than last February’s level and 6.3% lower than in September 2019. A 10.0% year-on-year drop in construction was the smallest since March. Construction orders flipped from a 46.2% on-year plunge in the second quarter to a 0.6% uptick in 3Q. British labor productivity, which had posted back-to-back drops of 0.5% in 1Q and 0.5% in 2Q, rebounded by a robust 5.2% last quarter. And finally, the Royal Institute of Chartered Surveyors monthly housing price indicator found 68% of surveyors reporting higher home prices last month. That is the fifth straight improvement.

German CPI inflation last month was confirmed at minus 0.2%, the same as September’s 68-month low. German inflation has been depressed by a VAT cut implemented last July.

Japanese core private domestic machinery orders suffered a setback in September, dropping back 4.4% on month and 11.5% on year. Export orders for machinery plunged 16.7% on month and 6.4% on year. Even worse, officials anticipate each likely to drop during the final quarter of 2020. Orders from the public sector are also likely to decline then.

Japan’s tertiary index of service sector activity grew 1.8% in September but remained 9.0% lower than a year earlier. And domestic producer prices in October matched September’s monthly drop of 0.2% and posted their largest year-on-year decline (2.1%) in five months.

CPI inflation of 7.6% in India last month was the highest in 77 months. Also in India, industrial production dipped 0.2% in September but turned positive in its year-on-year comparison (0.2%) for the first time since February.

Swedish CPI inflation fell to a 5-month low of 0.3% in October. Core inflation was also 0.3%.

Irish consumer prices in October were 1.5% lower than a year earlier, representing the most deflationary point in a decade.

South African unemployment jumped 7.5 percentage points to a 17-year high of 30.8% last quarter.

The on-year decline in Russian real GDP was trimmed from 8.0% in the second quarter to 4.5% last quarter.

On the central bank front, the National Bank of Romania‘s policy interest rate was left unchanged at 1.5%. Three cuts imposed between March and August totaled a full percentage point. While leaving its interest rate steady this time, policymakers augmented monetary stimulus by slicing reserve requirements to 5% from 6%. Inflation is projected to hover near 2.5% over the forecast horizon.

The National Bank of Serbia also kept its key interest rate unchanged at 1.25%. That record low was reached after a 25-basis point cut in June. A 50-bp cut in March and 25-bp reduction in April were also done. A released statement leaves the door open to possible additional eading in the future.

The Bank of Mexico is also conducting a monetary policy review and thought likely to cut its interest rate.

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


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