Market Heebie Jeebies from Chinese Military Exercises and Restrictive Monetary Policies
May 24, 2024
Stock markets in the Pacific Rim ended a difficult week with a difficult session, dropping today by 1.4% in Hong Kong, 1.3% in South Korea, 1.2% in Japan, and 1.1% in Australia. European share prices are down 0.4% in the U.K., France, and Germany, and Nasdaq futures point to a further loss of around 1% on the U.S. open.
Investor restlessness has set over when and how quickly the major central banks might cut interest rates. The European Central Bank seems good to go next month but likely to wait quite a while before considering a second reduction. Maybe the Bank of England cuts later in the summer, but the start of Fed easing, which serves as a cue for many second-tier economy central banks around the world, keeps slip-sliding away.
The dollar lost 0.2% in overnight trading against the euro, Aussie dollar, New Zealand dollar, and sterling and slid by 0.1% versus the Canadian and Mexican currencies. The prices for Bitcoin and WTI oil have fallen 0.8% and 0.6% so far today.
Japanese consumer price inflation decelerated to a 3-month low of 2.5% overall and 2.2% excluding fresh food in April. Those levels were down substantially from 4.3% and 4.2%, respectively, in January 2023. In light of the very small rise thus far in the Bank of Japan’s short-term interest rate from -0.1% to 0-0.1% two months ago, the rise and fall of Japanese inflation during the past two years highlights a poorly understood dimension of price behavior around the world this decade, namely that the primal cause of not over-expansionary monetary policy. Neither Japan’s fiscal debt that exceeds 250% of GDP, nor a 10% drop of the yen against the dollar so far in 2024, nor the lack of an interest rate hike for more than two decades and the continuing very low level of Japanese interest rates achieved the goal of stable inflation for a sustained span of time and anchored around the 2.0% objective.
When energy costs as well as perishable food are excluded, the so-called core core Japanese CPI inflation rate dropped to a 19-month low last month from 2.4% in April from 3.7% just three months earlier, providing further proof of the comparative impotence of monetary policy of a tool for raising inflation back to a pace considered stable and sustainable. And conversely, the effect of a sharp rise in the interest rates in other economies since 2022 is taking much longer than imagined to bring inflation down all the way to 2.0%.
With the world’s geopolitical attention still largely focused on the Middle East and Russian incursion into Ukraine, China conducted military exercises close to Taiwan in a show of intimidation against the newly elected president of the republic, Lai Ching-te, as well as governments in the Pacific Rim aligned with the United States.
Retail sales volume in the U.K. slumped 2.3% on month in April and were 2.7% smaller than a year earlier. Each of those drops exceeded expectations and represented to poorest monthly performance so fare this year. Alternatively, the monthly index of British consumer confidence increased to a 29-month high of -17 in May.
French business confidence slid marginally to a 3-month low of 98.5 in May. While manufacturing and retail trade sectors fell to 4- and 6-month lows, services, construction, and employment improved to 2-, 6- and 7-month highs.
On-year jobs growth in Switzerland of 1.8% last quarter matched the pace experienced in the second half of 2023 but was down from 2.2% in the first half of the year.
U.S. durable goods orders had been expected to drop somewhat more than 0.5% in April following solid increases in February and March but instead climbed another 0.7%. Orders for non-defense capital goods other than aircraft also surpassed expectations. This is actually not a goods sign. The hold-up in Fed easing is not merely due to inflation not receding so far this year but also surprisingly strong economic activity, which had been expected to slow this year in lagged response to earlier Fed interest rate hikes.
The second estimate of German GDP growth last quarter was left unrevised from the preliminary report. Real GDP rose 0.2% following an upwardly revised 0.5% contraction in the final quarter of 2023. In year-on-year terms, GDP fell 0.2% following a mere 0.1% rise between the first quarters of 2022 and 2023. This net 0.1% dip over a span of eight quarters attests to how long Europe’s economy has been in a funk triggered by Russia’s invasion of Ukraine early in 2022 the concurrent supply-side upsurge of inflation that in turn elicited a rapid tightening of regional monetary policy.
Chinese President Xi Jinping prioritization of security and absolute power vested in the Communist Party at the expense of lessening economic growth is chasing away multinational operations. Net foreign direct investment into China during the first four months of 2024 was 27.9% less than a year earlier. This far surpassed the 8.0% decline in all of 2023 and an average 8.2% per year increase during 2019-2022.
Czech consumer sentiment and business confidence both softened to 2-month lows in May. Danish manufacturing sector confidence rose to a 25-month high, in contrast.
Canadian retail sales posted slight declines in each month of the first quarter but are believed to have stopped that streak in April.
Price data released this Friday include
- The 14th straight year-on-year decline in Spanish producer prices, which fell 6.6% in April below its year-earlier level.
- A 0.5% monthly rise in Swedish producer prices that swung the year-on-year comparison into the black (+0.9%) for the first time since March 2023.
- Finnish producer prices rose 0.9% on month but fell 2.1% on year in April, marking their 13th straight month of producer price deflation.
- Malaysian consumer price inflation held steady at 1.8% for a third straight time in April, having earlier touched 4.7% in both August 2021 and August 2022.
Copyright 2024, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: British retail sales and consumer confidence, French business confidence, Japanese CPI
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