Watching China and Central Banks

July 15, 2021

The U.S. dollar edged slightly higher overnight, with gains of 0.4% against the Australian and New Zealand currencies, 0.3% versus the euro, and 0.1% relative to the Swiss franc, loonie, and DXY weighted index. Alternatively, the dollar slipped 0.2% against the Chinese yuan and 0.1% versus sterling, while dollar/yen stayed steady.

Share prices had climbed Thursday by 1.0% in China, 1.1% in Taiwan and Indonesia, 0.8% in Hong Kong and 0.7% in South Korea. Japan’s Nikkei index closed down 1.2%, in contrast, and in Europe markets so far have lost between 0.6% and 1.0% in Germany, Italy, Spain, France and the United Kingdom.

Worries that inflation will prove less transitory than central bankers hope and risk on old-fashioned monetary policy-induced recession is one factor weighing on investor confidence, and an upturn of Covid infections in many places including the United States is another. A third concern is China’s slower pace of growth. China released a slew of data today.

The ten-year Treasury yield retreated two basis points further to a 5-month low of 1.33%. Comparable sovereign debt yields are down two basis points today  in Germany and a single basis point in Japan. The price of WTI oil fell 1.6%, while gold remain steady.

Fed Chairman Powell will be reprising yesterday’s Humphrey-Hawkins congressional testimony on monetary policy and the U.S. economy, this time before the Senate Banking Committee. Sticking to earlier guidance, Powell yesterday said the tapering of Fed quantitative easing is “still a ways off” and characterized recent inflation as higher than anticipated but largely dominated by a narrow spectrum of items like energy and used car sales that are affected by special factors such as supply bottlenecks amid the lifting of restrictions on social gathering. Former Treasury Secretary and President of Harvard Larry Summers leads an influential minority of economists critical of the Fed’s complacency that inflation will subside of its own accord.

Most, but not all, central banks around the world have adopted views similar to the Fed’s and have not yet begun policy normalization. One region where interest rates have been raised this year involves members of the old Soviet Union. Central banks in Russia, Ukraine, Georgia, Kyrgyzstan, Armenia, and Belarus have done so. The other area where rates have increased has been in Latin America, which has a history of hyper-inflation. The Bank of Mexico engineered a 25-basis point interest rate hike in June that reversed a cut in February, and the Bank of Brazil had authorized 75-basis point rate increases in March, May and June. Yesterday, the Central Bank of Chile followed their lead, raising its benchmark rate by 25 basis points to 0.75%. In a statement, officials said that with Chile’s output gap diminishing rapidly, it is appropriate to embark on a gradual withdrawal of monetary stimulus.

Aside from Fed Chairman Powell’s testimony, the U.S. central bank made news yesterday with the release of its Beige Book that characterized growth around the twelve Fed districts to be expanding either robustly or moderately and which projected continuing price pressures in coming months.

In the second half of 2020, Chinese GDP had expanded at a quarterly rate of a bit more than 3.0%, but that slowed appreciably to 0.4% in the first quarter of 2021 and 1.3% last quarter. Compared to a year earlier, GDP growth slowed from 18.1% in 1Q to 7.9% in 2Q and averaged 12.7% for the first half of 2021.

Industrial production last month in China went up 8.3% from June 2020’s level, which was the smallest pace since December. Average industrial production in the first half of 2021 was up 15.9% compared to the level in 1H 2020.

Chinese retail sales rose 0.7% last month and by 12.1% from a year earlier. Like industrial production, that was the smallest on-year advance since December and down from a 23.0% average rise in the first half of this year.

Chinese fixed asset investment rose 12.6% on year in the first half of 2021, and June’s jobless rate of 5.0% matched May’s two-year low. Capacity utilization in 2Q 2021 was at a record high of 78.4% compared to a previous cyclical low of 67.3% in the first quarter of 2020. Property price inflation of 4.7% in June represented a 3-month low.

In other overnight news, Australia reported a greater-than-expected decline of unemployment to 4.9% in June from 5.1% in May, and this was accompanied by a solid 29.1k rise in employment after +115.2k in May. But labor participation remained at 66.2% instead of rising as hoped.

Japan’s tertiary index, a gauge of service sector activity, slumped 2.7% in May following drops of 0.7% in 1Q and 0.8% in April. Even so, the index was 10.3% above its pandemic-depressed level in May 2020. Japanese Covid infection pace is again intensifying with only about a week before the Tokyo Olympics are to begin.

British labor market statistics showed a spike in average wage earnings to at least a 20-year high of 7.3% on year in March-May. The count of British jobless claims fell 114.8k last month, bringing the four-month reduction since February to 282.6 thousand workers. But the jobless rate ticked back up to 4.8%, matching March’s level and following 4.7% in April.

Italian CPI inflation last month was confirmed unchanged from May’s 30-month high of 1.3%.

As expected, officials at the Bank of Korea left their base rate unchanged at 0.50%. There had been two cuts totaling 75 basis points during the first half of 2020. “he Board will maintain an accommodative stance of monetary policy as there remain uncertainties posed by the virus, although the Korean economy is expected to continue its recovery and inflation to remain at a high level for some time.”

Several U.S. economic data were reported:

  • 360 new jobless insurance claims last week were aligned with analyst expectations and their lowest since the onset of the pandemic.
  • Import prices rose 1.0% on month in June and 11.2% on year. That was the sixth monthly advance of 1.0% or more in the past seven months. In June 2020, import prices had been 4.0% lower than a year earlier. Imported fuel price inflation swung from -37.5% in June 2020 to +85.1% last month. All other import prices collectively accelerated from -0.2% in June 2020 to +6.5% in June 2021.
  • U.S. export prices advanced 1.2% in June and were 16.8% above their year earlier level.
  • The Empire State manufacturing index leaped to a record high reading of 43 this month from 17.4 in June. Analysts had anticipated only a marginal improvement.
  • The Philly Fed manufacturing index slid to 21.9 in July. That’s a 7-month low.
  • Industrial production rose only 0.4% last month due to an unexpected 0.1% dip in factory output. Capacity utilization improved 0.3 percentage points to 74.5% in June, matching the June 2020 level. In comparisons with the year-earlier month, industrial production growth fell to 9.8% in June from 16.3% in May.

Copyright 2021, Larry Greenberg. All rights reserved. No secondary distribution without express permission.


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