The financial markets have been roiled this week by moves made by the People’s Bank of China to weaken the yuan in a bid to aid exporters threatened by the slowing Chinese economy.
By Peter Martin
Thursday, August 13, 2015
The main US stock indices came into Thursday having suffered back-to-back sessions of large volatility, but a batch of significant economic indicators released this morning have switched the focus back to domestic matters for the time being and restored some sense of calm.
The US labor market is still looking very healthy: jobless claims rose 5000 last week to 274,000, still a low level by historical standards, while the week prior was revised down from 270,000 to 269,000. That was enough to keep the four-week moving average heading lower, dropping from 268,000 to 266,250 and looking extremely favorable (close to 15,000 lower) compared to the level from a month ago. The continued improvement of the jobs market will have Hawks at the Fed arguing that the requisite signs of tightening are enough to warrant a rate hike at the next FOMC meeting, but employment is only half the story. Inflation must also be taken into account and there are indications that the outlook is not positive.
With China’s economy slowing, there are worries that global demand could soften and on top of that, the weakening of the yuan will lower the price of goods exported from China. Other exporters in South East Asia may be compelled to price their goods lower in order to remain competitive and this would drag on prices paid in the West. Ominously, there are deflationary signs dating back before the Chinese central bank made its move: US import prices plunged 0.9% last month, after a revised 0.0% move in June, taking the annual price change to -10.4%. Declines in export prices were not as sharp, but still bear the negative influence of the strong dollar, falling 0.2% on the month, and down 6.1% month year-on-year. Oil has had a tough week, now standing closer to $40 a barrel than $50, and we would consequently expect lower energy prices to weigh on August’s cross-border price report. The last FOMC statement maintained that ‘survey based measures of longer-term inflation expectations have remained stable’, but the evidence suggests deflation remains a key risk. In my opinion, not only is inflation so low that it effectively blocks the Fed from tightening, but the situation appears to be worsening.
The good news is that retail sales enjoyed a healthy bounce last month, which implies the economy is on solid footing in the third quarter. Retail sales jumped 0.6% in July, while June’s sales were revised up to flat from the -0.3% that was originally reported and it is perhaps those revisions that are the more encouraging part of the data. Excluding autos and gasoline, July sales were up 0.4%, while June was revised up sharply to +0.4% from -0.2%. The strength of this report suggest US consumers are boosting the economy and judging by the strength of the US dollar today, market participants are focussing more on this fact than on the weak price data. EUR/USD fell 0.46% to 1.1106 in early trading, while USD/CAD climbed 0.59% to 1.3055.
The upbeat retail sales were not enough to lift risk appetite on Wall Street, though, which remains shaky after the week’s developments with the Chinese yuan. Stocks opened slightly in the red in New York and shortly after the opening bell, the Dow Jones was down 0.25% or 44 points at 17,359, while the S&P 500 Index shed 0.19% to stand at 2082.0.
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