U.S. Equities Not Out of the Woods and Yen Drops After BOJ Policy Tweet
October 31, 2023
Yesterday’s 1.2-1.6% advance in major U.S. stock market indices appears more a case of bottom-fishing than the start of an uptrend. The FOMC’s two-day policy review that starts today isn’t expected to result in an interest rate hike, but the post-meeting press conference will likely strike a hawkish tone in light of recent robust U.S. data. Other concerns, both domestic and international, continue to spook investors. America’s deep political fractures create the possibility of a federal government shutdown next month and create all sorts of uncertainty at a time when geopolitics commands Washington’s attention and leadership.
Stock markets closed 1.7%, 1.4% and 0.9% lower today in Hong Kong, South Korea and Taiwan. U.S. share prices haven’t extended yesterday’s advance, and European markets have gain only moderately.
Ten-year sovereign debt yields have fallen today by 7 basis points in Great Britain, 3 bps in Germany, Italy and France, and 4 bps in the United States.
The dollar‘s appeal as a safe haven has been paramount. The U.S. currency has strengthened so far Tuesday by 1.3% against the yen, 0.6% relative to the Australian dollar and Swiss franc, 0.3% versus the Canadian dollar, 0.2% against sterling and 0.1% versus the euro and Chinese yuan. In spite of dollar appreciation, gold climbed another 0.4% and has maintained a perch above the psychological $2000 per ounce level. Oil firmed 0.2%, but Bitcoin slid 0.7%.
On this Halloween bookend of October, the usual end-of-month deluge of economic data has flowed. Here are some highlights.
Japan reported and as-expected 0.1 percentage point dip of the jobless rate to 2.6% but also a much weaker-than-expected 0.2% September uptick in industrial production. Compared to a year earlier, IP dropped 4.6% in September and 3.7% on average in the third quarter. Japanese consumer confidence in October rose 0.5 points above September’s half-year low and remained historically very pessimistic with a reading of 35.7. Housing starts and construction orders respectively recorded on-year declines of 6.8% and 3.0%.
Year-on-year U.S. home price inflation in August rose 5.6% according to the FHFA index, an 8-month high, and by a 7-month best 2.2% according to the Case-Shiller index of 20 metropolitan areas, which in April-May had been 1.7% below year-earlier levels. Although at a 5-quarter low, America’s employment cost index was up 4.3% year-on-year in the third quarter, not far beneath the 5.1% reading in the final quarter of 2022. Consumers are spooked by domestic and international political and economic news but spending strongly nonetheless. The highlight of the flash GDP report last week was a 4.0% annualized quarter-on-quarter leap in personal consumption, but today’s consumer confidence index from the Conference Board revealed a 5-month low reading of 102.6, down from 104.3 in September and 114.0 in July. The Chicago regional purchasing managers index posted its fourteenth straight sub-50 reading, a 2-month high of 44.4 in October.
China’s government-authorized NBS manufacturing purchasing managers index fell 0.7 points to a 3-month low of 49.5, thus returning to sub-50 contractionary territory and to only 2.5 points above last December’s 34-month low. The non-manufacturing Chinese PMI reading of 50.6 constitutes a 10-month low and signals a pace that has slowed close to stagnation.
South Korean industrial production and retail sales were respectively a mere 0.3% higher and 0.7% lower in September than a year ago.
Third-quarter GDP growth in the euro area arrived a tad below expectations at -0.1% according to a flash report based on incomplete information. Year-on-year growth was only 0.1%, down from 0.5% in 2Q and 2.4% in the third quarter of 2022. Among Euroland’s big-four economies, GDP stagnated in Italy and dipped 0.1% in Germany, while posting quarterly increases of 0.1% in France and 0.3% in Spain. Year-on-year growth in Ireland has swung from +10.8% in the final quarter of 2022 to -4.7% in the third quarter of 2023.
The weak pulse of Euroland economic activity has been induced by progressive monetary tightening that saw the ECB deposit and refinancing rates climb lows of -0.5% and zero percent to current highs of 4.0% and 4.5%. Weak demand in turn continues depress inflation in the common currency bloc. The 12-month rise of consumer prices slowed from 10.6% in October 2022 to 4.3% in September 2023 and a 27-month low of 2.9% this month, according to a preliminary estimate. Core CPI inflation excluding food and energy printed at 4.2% in October, down from 4.5% in September and 5.5% in both June and July. Among the big-four Euroland economies, France now tops the inflation leader board at 4.5%, followed by Spain at 3.5%, Germany at 3.0% and Italy at 1.9%.
German retail sales volume in September was yet again weaker than anticipated, falling 0.8% on month and 4.3% on year. Germany also reported the seventh consecutive month of import price deflation. A 16.4% on-year decline of import prices in August had been the biggest such drop in 441 months and was followed by a 14.3% year-on-year slide in September that was dominated by energy but that also included a collective 3.4% on-year drop in non-energy items.
Mexican GDP rose 0.9% last quarter. Although that was the best quarterly increase in a year, year-on-year growth decelerated to a 5-quarter low of 3.3%.
The aforementioned Bank of Japan Board meeting ended with an announcement of no change in the -0.1% overnight interest rate target and an unchanged desire to keep the ten-year Japanese Government Bond yield around zero percent. As rumored, however, there was a significant tweak in how the JGB goal is viewed and maintained. There’s no longer to be a target ceiling enforced in a strict and automatic way:
The Bank considers that strictly capping long-term interest rates by fixed-rate purchase operations at 1.0 percent for consecutive days, which it has offered every business day in principle, will have strong positive effects, but could also entail large side effects. Given this, it decided to conduct yield curve control mainly through large-scale JGB purchases and nimble market operations.
To blunt an excessive market reaction to the removal of a known cap on long-term interest rates, other language in the BOJ press release retained a dovish tone, such as “the Bank will patiently continue with monetary easing.” A published quarterly Outlook for Economic Activity and Prices revised projected core inflation upward. Excluding fresh food, consumer prices are projected to rise 2.8% in both fiscal 2023 and fiscal 2024 but then fall below target to 1.7%. Only when also excluding both perishable food and energy is inflation close to the 2% target in both fiscal 2024 and FY 2025.
The Central Bank of Armenia‘s interest rate has been reduced by a further 25 basis points to 9.5%. This was the fourth cut since June, totaling 125 basis points from a peak of 10.75% reached initially last December. Officials are proceeding cautiously in light of the much steeper descent of CPI inflation from 10.3% in mid-2022 to 0.1% as of September. The interest rate’s pandemic low of 4.25% had prevailed from June 2020 to December 2020, and the bank’s medium-term inflation target is 4.0%.
The National Bank of Kyrgyzstan likewise is maintaining an interest level (13.0%) that is well above the latest on-year rate of CPI inflation (9.6%). The interest rate has been at 13% since a one percentage point reduction a whole year ago. From a base of 4.25% in 2020, the rate was raised to 8.0% by end-2021 and by 600 basis poins in February-April of 2022. CPI inflation peaked at an 11 year high of 16.2% last February, but the central bank’s medium-term inflation target of 5-7% still likes below the current pace.
Copyright 2023, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Bank of Japan, Central Bank of Armenia, Euroland CPI and GDP, FOMC, German import prices and retail sales, Japanese industrial production, National Bank of Kyrgyzstan
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