Recession Fears Assuaged by Data – Currency Thoughts
Recession Fears Assuaged by Data
August 15, 2024
Since midyear, worries about intractable inflation had been overcome by concerns that tight monetary polices in the United States and elsewhere had hung around too long and were now pushing economies toward recession. Data reported today seemingly lessen the possibility of that alternative danger. A Goldilocks scenario with low unemployment, positive economic growth and continuing disinflation appears still intact.
Today’s financial market fallout of such relief has been pretty pronounced.
- The dollar strengthened overnight by 1.2% against Japan’s yen, 0.8% relative to the Swiss franc, 0.4% versus the euro, and 0.5% as calculated by the DXY weighted index.
- The previous sharp drop of long-term interest rates this month has been trimmed, with overnight rises in 10-year sovereign debt yields of 11 basis points in the United States, 10 basis points in Great Britain, seven basis points in Germany, six basis points in France, Italy and Spain but only one basis point in Japan.
- The Nasdaq, DOW and SPX have posted gains so far ranging from 0.9% to 1.7%, and share prices in Euroland’s four biggest economies are each up at least 1.0%. Earlier in the Pacific Rim, stocks closed up 0.9% in China, Singapore and South Korea, 0.8% in Japan and 1.1% in New Zealand.
- Prices for Bitcoin and WTI oil are currently 1.7% and 1.1% higher.
Today’s good news began in Japan, where GDP growth last quarter rebounded 0.8%, or 3.1% expressed at an annualized pace (a full percentage point above analyst expectations), according to the preliminary report. That more than reversed a 2.3% contraction between last year’s final quarter and 1Q 2024. Personal consumption shot up 4.0% annualized and accounted for 2.2 percentage points of the net 3.1% GDP advance. Business investment and government spending also made positive contributions to GDP growth, while net foreign demand and inventories together exerted a drag equivalent to 0.9 percentage points. The GDP price deflator was 3.0% higher than a year earlier.
That pace of inflation plus the robust spending by consumers point to additional steps by the Bank of Japan toward a more normalized credit policy. But officials will still approach the task cautiously. The monthly drop in Japanese industrial production in June was revised larger to 4.2% and associated with a 7.9% year-on-year decrease.
Thursday also saw a slew of Chinese data releases. A 5.1% on-year rise of industrial production in July was a tad below expectations and its smallest in four months. On-year retail sales growth of 2.7% was a tad better than forecast. Unemployment ticked 0.1 percentage point higher to a 4-month peak of 5.2%, and fixed asset business investment in July was somewhat lower than the 3.9% average pace during the first half of 2024. Finally, a 4.9% year-on-year drop in property prices was the weakest performance in 109 months.
Among reported U.S. data this Thursday, much more robust retail sales, which grew 1.0% on month and 2.7% on year in July overshadowed a weaker-than-forecast industrial production number. IP fell 0.6% on month, twice as much as predicted and its worst result in a half year. Industrial production also was 0.2% lower than in July 2022 and associated with a 0.6 percentage point regression of capacity utilization to a 3-month low of 77.8%.
Investors were also cheered by a monthly rise in U.S. import prices of only 0.1% last month, leaving such unchanged from their April level and just 1.6% higher than in July 2023 despite a 6.5% on-year jump in import fuel costs. Also, new U.S. jobless insurance claims last week looked less recessionary last week, dropping to 227k from 250k two weeks earlier. Finally, reported regional manufacturing surveys from the N.Y. and Philly Feds produced divergent results, a 6-month high in the former but a 7-month low in the latter.
British GDP rose 0.6% last quarter (not annualized) to extend the first quarter increase of 0.7%. This resulted in the best on-year GDP comparison (+0.9%) in seven quarters. All of the positive energy emanated from service sector industries. However, a second data report showed a much better 0.8% upturn in industrial production during June, which nonetheless was still 1.4% below its year-earlier level. Factory output rose 1.1%, while construction rose 0.5% monthly. Britain still suffers from chronic external deficits, which in June printed at GBP 5.32 billion for goods and services and GBP 18.9 billion for goods only.
More and more central banks are joining the trend toward lower interest rates. On Wednesday, the Reserve Bank of New Zealand had cut its Official Cash Rate by 25 basis points. Such had been kept at a cyclical peak of 5.50% since May 2023. Today’s turn was taken by the Central Bank of the Philippines, which like the RBNZ the day before sprung a 25-basis point interest rate cut, breaking a span of ten months when the rate was maintained at a peak of 6.50%. Today’s initial cut, like New Zealand’s, had not been anticipated. In the Filipino case, consumer price inflation had risen 0.7 percentage points to a 10-month high of 4.4% last month, and economic growth has lately been more than respectable. But according to a released statement, “headline inflation is projected to trend downward to within the government’s 2 ‑ 4 percent target range despite the uptick in July.”
Norwegian monetary policy was also reviewed today, and officials there agreed to keep their policy interest rate at 4.5% since a 25-basis point hike last December culminated a tightening cycle that began in September 2021 from a base of zero percent. Norwegian CPI inflation of 2.8% currently exceeds the 2.0% target, and Bank of Norway officials also worry that krone depreciation this year could interrupt the disinflationary process.
Among other data reported today, Australia’s unemployment rate climbed to a 29-month high of 4.2% in July despite another strong increase in the number of jobs.
The Swiss combined PPI/import price index stagnated for a second consecutive month in July and was 1.7% lower than a year earlier.
New Zealand food prices were just 0.6% above a year earlier in July.
And Slovakian consumer price inflation bounced off a 38-month low of 2.1% in June to 2.6% in July, which was still far beneath a 15.4% peak in February 2023.
Copyright 2024, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Australian labor market statistics, British GDP and trade, Japanese GDP and industrial production, latest monthly Chinese economic data, U.S. import prices, U.S. industrial production and retail sales
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