Several Significant Developments for Investors to Process
August 15, 2023
Chinese July data have deepened concerns about the world’s second largest economy. Weaker-than-anticipated on-year growth in China’s retail sales of 2.5% was down from 8.2% in the first half of 2023. Industrial production growth of 3.7% year-on-year also undershot expectations. The unemployment rate edged up to a 4-month high of 5.3%, and fixed asset investment growth of 3.4% in January-July was down from a pace of 5.1% both in 2022 and the first quarter of 2023. Adding further urgency to the situation, the People’s Bank of China’s one-year MLF interest rate has been cut by 15 basis points to 2.5%, and the 7-day reverse repo rate has been lowered by 10 bps. China’s currency has slipped to 7.29 per dollar, approximating a nine-month low.
A fourth indictment of former U.S. President Trump has occurred, this one involving the attempted overturning of Georgia’s 2020 election result and seemingly the easiest to prove.
The Argentine peso was devalued yesterday by 18% and, at 349.8 per U.S. dollar is currently 24.2% below its mid-July level just one month ago. The currency’s plunge followed news that a far-right United for Change Party captured the biggest share of Sunday’s primary election vote. It’s leader Milei wants to get rid of the central bank, replace the peso with the U.S. dollar, legalize the trafficking of human organs, deregulate gun purchases, and strip away measures to contain climate change. Argentina’s economy is grappling with 116% CPI inflation.
The Fitch credit rating agency, which reduced the rating for ten U.S. small-to mid-sized banks a week ago, has indicated that a broader spectrum of downgrades affecting U.S. money center banks is possible in the future.
Japanese real GDP advanced 1.5% in the second quarter according to a preliminary estimate, equivalent to 6.0% expressed at an annualized rate. This was the fastest quarterly pace in ten quarters, double analyst expectations, and well above U.S. growth of 2.4% last quarter. Growth in 2Q was not balanced, however, coming primarily from net export demand, as exports increased 13.6% while imports contracted 16.2%. Their combined effect was to augment the GDP growth rate by 7.2 percentage points (ppts), easily offsetting negative contributions of 1.1 ppts from personal consumption and 0.7 ppts from inventory changes. Year-on-year GDP growth held steady at 2.0%, a bit less than 2.6% in the United States. Japan’s GDP price deflator was 3.4% above its year-earlier level.
Japan 10-year sovereign debt yield is up two basis points today to 0.62%, and the Nikkei-225 equity index deviated from the downward trend today of most other stock markets, closing up 0.6%. But the yen at 145.58 per dollar now is 12% weaker than its 2023 high touched in mid-January, and it is near levels at which the Bank of Japan provided intervention support in September 2023.
The Russian ruble is also in today’s spotlight. One day after such fell to a 17-month low and amid accusations from a high advisor to President Putin blaming a loose monetary policy for the currency’s eroded value, the Central Bank of Russia held an emergency board meeting today and agreed to hike the benchmark interest rate by 350 basis points to a 16-month high of 12.0%. In the early days of the war with Ukraine, the rate was jacked up in two moves by 1,150 basis points to 20.0% by end-February 2022. 900 basis points of that increase was reversed by May and a further 350 bps of reduction followed by September. The rate remained at 7.5% until a one percentage point high last month. A released statement justifies today’s rate hike as follows:
Steady growth in domestic demand surpassing the capacity to expand output amplifies the underlying inflationary pressure and has impact on the ruble’s exchange rate dynamics through elevated demand for imports. Consequently, the pass-through of the ruble’s depreciation to prices is gaining momentum and inflation expectations are on the rise
July retail sales in the United States grew 0.7% on month and 3.2% on year, easily beating analyst expectations and delivering another blow against hopes that the Fed might begin lower interest rates sooner than officials have been signalling rhetorically. Sales in May-July were 1.1% greater than in the prior three-month period. U.S. import prices went up 0.4% last month, their biggest gain in 14 months reflecting a 3.6% monthly resurgence of imported fuel costs.
The Empire State manufacturing index relapsed to a 3-month low of -19.0 this month following readings of 1.1 in July and 6.6 in June. U.S. existing home sales fell 3.3% in June to a 5-month low.
The latest British monthly labor market statistics depict accelerating wage cost pressure despite rising unemployment. Overall on-year increases in average weekly earnings of 8.2% and regular pay of 7.8% were the most in 23 months and ever, respectively. But jobless insurance claims unexpectedly rose 29k in July and by 72.8k over the last five months versus 30.3k in the prior five-month period. Unemployment of 4.2% was the most since the final quarter of 2021, and employment fell by 66k last quarter. British labor productivity in the first half of 2023 was 0.5% lower than a year earlier.
Investor sentiment toward the Germany economic outlook was not quite as pessimistic in August as July‘s 7-month lowpoint, according to the ZEW expectations index, but perceived current conditions deteriorated sharply further to a reading of -71.3 from June’s -59.5 score. For all of the euro area, expectations and current conditions drew readings of -5.5 (a 4-month high) and -42.0 (a 2-month high).
The combined Swiss producer price and import price index dipped 0.1% on month and 0.6% on year in July. Import prices fell 5.0% on year, while domestic producer prices were 1.7% higher.
A 0.6% increase in Canadian consumer prices last month lifted the 12-month rate of rise to a 2-month high of 3.3% from 2.8% in June. Canadian CPI inflation crested in June 2022 at a 39-year high of 8.1%.
Swedish CPI inflation held steady in July at 9.3%, breaking a 4-month sequence of deceleration. Sweden’s 382-month peak of CPI inflation (12.3%) was set last December. Danish producer prices in June edged 0.1% lower both on month and on year.
The Bank of Uganda implemented a 50-basis point interest rate cut to 9.5%. That was the rate’s first modification since a full percentage point hike last October and its first reduction since mid-2021.
The ten-year U.S. Treasury yield had been four basis points higher on the day prior to the release of U.S. data but now shows a net dip of one basis point. The increase of 10-year German bund and British gilt yields have been trimmed. Equities have had a difficult session, closing down 1.0% in Hong Kong and 0.8% in South Korea and showing losses so far today of 0.8% in the United States, 1.3% in the U.K., 1.1% in France and 0.9% in Germany. Prices for oil and gold are down 2.0% and 0.4%, while bitcoin is also marginally in the red. The weighted DXY dollar index has been hovering near 103.0.
Copyright 2023, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Central Bank of Russia, German and Euroland ZEW expectations, Japanese GDP, Swiss PPI, U.S. import prices, U.S. retail sales
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