A Chinese Cloud Moves Through Financial Markets

August 2, 2022

The game of chicken between House Speaker Pelosi and Chinese President Xi has generated a new run by investors into safer assets. Pelosi appears determined to not scrap her Asian trip stop in Taiwan, and Xi is warning of unspecified reprisals.

In overnight market action, share prices closed down 2.4% in Hong Kong, 2.3% in China, 1.6% in Taiwan, and 1.4% in Japan. Stock markets in Italy, Germany and France are down so far by 0.8%, 0.6% and 0.5%, and U.S. futures have fallen similarly.

The flight to safety depressed 10-year sovereign bond yields by 7 basis points in the U.K., 5 bps in Germany and 2 bps in the United States, and the ten-year Japanese JGB yield is at a mere 0.16%.

The dollar was generally well-bid overnight with one notable exception, gaining 0.6% relative to the kiwi, 0.5% against the Mexican peso, 0.4% versus the euro, 0.3% against the Swiss franc and sterling, and 0.2% versus the Australian dollar but losing 0.4% against the yen.

The price of gold advanced 0.5%, but Bitcoin (down 1.6%) again buckled in the face of geopolitical uncertainty. The price of WTI oil is 0.2% softer.

There have been more signs that more policy effort will be needed to restore price stability. South Korean CPI inflation rose 0.3 percentage points to a 283-month high of 6.3% in July. Iranian CPI inflation of 54.0% last month was 1.5 percentage points higher than in June and the most in 325 months. Pakistani wholesale price inflation of 38.6% almost matched June’s record pace of 38.9%, and central banks in both Australia and Armenia announced further interest rate increases today.

  • The Reserve Bank of Australia‘s Officials Cash Rate¬† was raised to 1.85% from 1.35%. This was the third straight monthly hike of half a percentage point. An initial 15-basis point move from the record low of 0.10% was done in May. A released statement predicts a further rise in Australian CPI inflation to 7.75% this year, then a slow retreat to a little more than 4% in 2023 and 3%, the target ceiling, not until 2024. In the early days of the pandemic, CPI inflation had dipped as low as minus 0.3% in the second quarter of 2020 but has risen from 1.1% in 1Q 2021 to 6.1% last quarter, which was its highest level in 21 years. In his subsequent press conference, Governor Lowe implied that more rate hikes will occur but underscored that doing so is not yet a sealed deal and will instead depend on the evolution of inflation. One piece of good news is that medium-term inflation expectations so far remain well anchored, and monetary restraint has helped to constrain demand. Projected economic growth this year was revised downward by a percentage point to 2.35%.
  • The Central Bank of Armenia had cut its refinancing rate in 2020 to a 10-year low of 4.5%. Increases from May 2021 had totaled 325 basis points by the end of that year and have been followed three more moves so far in 2022: 25 basis points in February, 125 bps in March and 50 basis points announced today. The new rate level of 9.5% is the highest its been since 2015 but not yet above the actual CPI inflation rate, which accelerated this year from 6.5% in February to 10.3% at midyear.

U.S. purchasing manager surveys released yesterday after this feature was posted showed a two-year low in the S&P Global manufacturing index of 52.2 that embodied softest 1-year outlook since October 2020. The ISM’s manufacturing PMI was better than expected, revealing just a 0.2-point dip to 52.8 and an 18.5-point reduction in the inflation sub-index to 60.

Today’s PMI menu features an 18-month low of 51.8 in the Irish manufacturing survey index¬† and a 19-month low in the Swiss manufacturing PMI of 58.0.

Swiss consumer confidence weakened sharply further this quarter to -41.7 from readings of -18.5 in 2Q, +3.2 in 1Q, 8.3 in 4Q 2021 and +9.6 a year ago. The low-point in the second quarter of 2020 had been -56.4.

Spanish consumer confidence sank to a 4-month low of 55.5 last month and was well below a 2021 high of 98.3 in September.

Retail sales in Hong Kong slumped 4.4% on month and 4.1% on year in June.

Portuguese industrial production had posted a third consecutive monthly decline in June, this time of 1.5%, but a 3.7% year-on-year rise was the biggest 12-month rate of increase in a year.

The British Nationwide house price index revealed a tepid 0.1% monthly uptick but continuing resilience in the double-digit 11.0% on-year advance from July 2011.

Copyright 2022, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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