I will be taking off Thursday and Friday, my first two days not writing this year. Have a relaxing holiday.
The Governor of the PBOC Yi Gang in an interview with the China Securities Journal tried to talk down the weakness in the yuan, saying its more to do with externalities like dollar strength everywhere. He also said the PBOC will keep in place its stable and prudent monetary policy. The yuan is higher in response but hasn’t even gotten back what it lost just yesterday. Chinese A shares did rally overnight. Bottom line, while the Chinese always do their best to maintain order in their markets as they hate disorderly moves, I also don’t think they want a pronounced move lower in the yuan from here.
It looks like Angela Merkel has come to an agreement with her coalition partners on the migrant problem and the euro is getting a lift in response as is the DAX.
As stated before, Q3 begins a net draw of monetary liquidity when combining the policy actions of the Fed and ECB. The BoJ is the only one left adding juice but the pace at which they are continues to slow. Their monetary base in June rose at a y/o/y rate of 7.4%, but that is the slowest rate since November 2012. As yield curve control is their main focus rather than the quantity of money, the BoJ remains in a stealth taper.
The Reserve Bank of Australia kept interest rates unchanged as expected at a record low of 1.5%. After reading the text of their statement I don’t believe they are in a rush to hike anytime soon but the Aussie $ is higher as are most currencies vs the dollar today.
The Swedish Riksbank also held policy unchanged as expected at -.50% but repeated that they will start the process of getting out from underneath NIRP by year end. With inflation around 2%, having negative interest rates is getting really difficult to substantiate. “The krona exchange rate has developed more weakly than expected and together with more rapid energy price increases, this will contribute to higher inflation in the year ahead compared with in the previous assessment” they said. I remain very concerned about how European bond markets with their microscopic yields handle the removal of extreme accommodation.
At the wholesale level, inflation continues higher in Europe. The May eurozone PPI was up 3% y/o/y, well more than the estimate of up 2.7%. An almost 8% jump in energy prices vs last year was the main reason. PPI ex energy was up a more modest 1.4%. If inflation does start to dig in, the ECB is wholly unprepared in dealing with it with their glacial pace of removing its easing.
Retail sales in the eurozone in May slightly missed expectations as they were unchanged m/o/m, one tenth less than forecasted and April was revised down by one tenth. The 1.4% y/o/y increase matches the lowest increase since last October. Growth has definitely slowed in Europe but off a great pace last year and hopefully they can still do 2% this year which for them is very good. Germany’s reaction to the trade tariffs, among others, will be key determinant.