Attention Shifts to Other Countries from the United States – Currency Thoughts
Attention Shifts to Other Countries from the United States
November 8, 2024
The broad Republican Party victory in Tuesday’s U.S. election has been center-stage in global financial markets most of this week. Running on a platform calling for sweeping changes on a wide range of policies, Trump got a slim majority of the popular vote (50.7% to Harris’ 47.7%) and 69 more declared electoral votes so far than Harris. With 53 senate seats already and two seats still undeclared, the Republicans will have a comfortable majority in the upper chamber, and they need only 7 of 25 remaining undeclared seats in the House of Representatives to secure a majority there as well. The 6-3 conservative majority in the Supreme Court is apt to grow larger as time passes, and Republicans also hold a majority of 50 state governors.
Susie Wiles, a co-chairman of President-Elect Trump’s campaign has been named Trump’s Chief of Staff at the White House. She is the rare person with good relations with both MAGA Republicans and the old guard.
The main news developments this Friday come from other countries. Most notably, the three-party government in Germany, Europe’s largest economy and most influential member of NATO, has collapsed over frictions among the coalition partners. Chancellor Scholz, who heads the Social Democrats, fired Finance Minister Lindner, a member of the Free Democrats. With the German budget debate scheduled next week, Scholz would like to muddle on as a minority government, receiving support from the Christian Democrats and other parties in opposition. But CDU leader Merz and others are calling for early elections now.
Germany’s own political crisis comes at an awful time for Europe, which must find a way to unite under a cohesive strategy of survival during a second Trump term that figures to push America First policies far beyond what was down in 2017-20. Ukraine’s prognosis took a huge hit from the U.S. election result, and Germany’s mess will make things even worse. European share prices have slipped today.
News of the Republican win sent the dollar broadly higher earlier this week. That’s a particular concern for Japan, which also got a new prime minister recently. Stabilizing the yen has been a challenging problem for Japanese officials. Monetary policy there has been out of step with those in other major industrialized countries, resulting in hugely unattractive interest rate differential for Japan and chronic downward pressure on the yen and raising the rise of stagflation. Investors learned today that Japanese intervention sales of foreign currency back on July 11th and 12th had totaled about $35 billion. At the time, the yen had depreciated slightly beyond 161 per dollar. In the ensuing two months, the yen recovered almost 15% against the dollar to almost 140. On the first day after the U.S. election, the yen fell sharply to around 155/$, and Finance Minister Kato today issued a not-so-subtle warning that another round of intervention could be done soon if such currency market volatility continues. The easiest way to fortify the yen would be for the Bank of Japan to raise interest rates more aggressively than the current cautious approach, but that too holds risks in these geopolitically difficult times.
The Chinese National Standing Congress has been meeting all week, with a need for policy stimulus high on the agenda. Today’s offering is a large new facility to enable municipalities to exchange off-balance sheet debt with the national government and thereby secure cheaper servicing costs. But after a week of high hopes, investors seem to have concluded that not enough stimulus and structural change to promote personal consumption is coming. Share prices fell today by 0.5% in China and 1.1% in Hong Kong by rose 0.6% in Taiwan.
Ten-year sovereign debt yields are down today by six basis points in Germany, France, Italy and Spain and by four bps in Great Britain and two bps in the United States. U.S. stock futures prior to today’s open took a break, with essentially little net change after significant fluctuation that saw indices stage an historic jump on Wednesday and continuing volatility yesterday.
The threat of Japanese intervention lifted the yen by 0.3%, but the dollar otherwise is showing gains of 0.6% versus the Mexican peso, 0.3% against the euro, loonie and Aussie dollar and 0.2% relative to sterling.
Trump want to lift U.S. oil production sharply, so it’s not surprising that WTI oil’s price fell 1.5% today. Bitcoin firmed 0.3% overnight, while gold slid 0.4%.
As much as Chairman Powell endeavored yesterday to comment on the election or his relationship with President-Elect Trump, one remark that the president doesn’t have the legal authority to replace a Fed Chairman before his term is complete did make an encouraging impression on financial markets. Powell is correct, but here’s an important caveat. The Federal Reserve is legally independent but also accountable to Congress. To the extent that Trump enjoys majorities in Congress, the ground rules governing Fed independence could conceivably be modified if Trump asks for such.
Data highlights today have been few. Japan reported that household spending fell in September by 1.3% on month and 1.1% on year. The indices of leading and coincident economic indicators rebounded in September from their sharp August declines.
China’s current account surplus widened to a 9-quarter high of almost $150 billion in July-September.
Swiss consumer confidence fell to a 5-month low last month.
Despite a 1.2% monthly rise in September, Italian retail sales were only 0.7% above year-earlier levels,and industrial production that month fell by 0.4% from August and 4.0% relative to September 2023. That was the largest on-year decline in 13 months.
A bunch of price data came out today. Latvian consumer price inflation rose to a one-year high of 2.0% in October. Greek CPI inflation slowed to a 4-month low of 2.4% in October. Brazilian consumer price inflation increased somewhat to 4.76% last month, still well down from 12.1% in April 2022. Chile had a similar 4.7% CPI inflation rate then, up from 4.1% in September and 3.7% last March but down from 14.1% in August 2022. Croatian PPI inflation, which was its most negative in nearly four years in September at -4.7%, became less so at -3.3% in October.
After cutting Peru’s central bank interest rate for an 11th time since September 2023, the BCRP board released a statement that at 5.0% “the real interest rate is approaching the level estimated as neutral. Headline and core consumer price inflation printed at 2.0% and 2.5% last month. Officials are projecting that inflation will remain within the target range over the forecast horizon but warn that warn investors not to assume “successive reductions in the interest rate.” Each of the 11 rate reductions thus far has been by 25 basis points, and cuts were skipped this year in March, June, July and October. The 5.0% is down from a peak of 7.75% from January to September of 2023 and at its lowest level since May 2022.
Copyright 2024, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Central Reserve Bank of Peru, German coalition collapses, Japanese intervention
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