October 8, 2019
Core U.S. Producer Prices Fall Most in More Than Four Years
“A measure of underlying U.S. producer prices posted the biggest monthly drop in more than four years, adding to signs of tame inflation pressures that potentially offer Federal Reserve policy makers more leeway to lower interest rates. The dollar fell. Excluding food and energy, producer prices decreased 0.3% in September from the prior month, compared with forecasts for a 0.2% increase, a Labor Department report showed Tuesday. The gauge was up 2% from a year earlier, the smallest gain in two years. The overall producer-price index also dropped 0.3% from August and was up 1.4% from a year earlier, the least since November 2016. The biggest monthly drop in the core PPI since February 2015 suggests weaker demand is forcing companies to lower prices and preventing them from passing along any higher costs resulting from tariffs. Subdued inflation, at the producer and consumer levels, provides space for the Fed to lower borrowing costs with little concern that price gains will surpass the central bank’s goal. Policy makers next meet Oct. 29-30. The report, which measures wholesale and other business selling costs, reflected monthly declines in indexes for machinery and vehicle wholesaling, as well as fuels and apparel retailing. Transportation and warehousing prices also dropped, while the index for hospital outpatient care increased. The U.S.-China trade war intensified in September when a new 15% tariff on about $112 billion of Chinese products took effect. This tranche, along with the batch that will impact about $160 billion worth of goods in December, more directly targets American consumers. Analysts monitor this report to assess potential price pressures set to show up at the consumer level. A more closely-watched measure of inflation, the core consumer price index, is estimated to have risen 2.4% from a year earlier in data released Thursday, which would equal the August reading.
Pound Slides to One-Month Low After Brexit Talks Stall
“The pound tumbled to a one-month low after U.K. Prime Minister Boris Johnson told German Chancellor Angela Merkel a Brexit deal is impossible under terms the European Union demands. Dimming prospects of an accord between Britain and the EU sent sterling sliding against all of its major peers. Further souring the mood, European Council President Donald Tusk accused Johnson of playing a “blame game“ in a comment on Twitter. The pound fell as much as 0.7% to $1.2205, the weakest level since Sept. 4. Strategists surveyed by Bloomberg estimate it would plunge to $1.11 — the weakest level since 1985 –if the U.K. left the EU without a divorce deal in place. Many of them say an extension of negotiations is more likely. “The last trading weeks have been one big highlight of how fragile the rally in the pound was over August and September,” said Lars Merklin, a strategist at Danske Bank A/S. “The coming weeks will likely bring an extension of the Brexit deadline.” Britain’s Parliament is set to be suspended from this evening, leaving an EU summit next week as the focus for traders, who may see it as a last chance to strike a deal before the Oct. 31 departure date set by Johnson. Options trading points to greater optimism that a no-deal Brexit will be averted this month, with a gauge of sentiment for the next week headed for the most positive close in four months. Strategists disagree on what impact a further extension to the Brexit deadline would have on foreign-exchange markets. While removing the immediate threat of a crash exit would be positive, there are already signs the uncertainty prompted by a delay has dented the economy, potentially paving the way for the Bank of England to ease monetary policy.”
Japan’s Household Spending Edged Up Ahead of Sales Tax Hike
“Japanese households increased spending for a ninth month in August without splurging ahead of a sales tax hike that took effect this month, suggesting the boom-and-bust consumption pattern that accompanied previous tax increases may not materialize this time. Household spending rose 1% from a year earlier, data from the internal affairs ministry showed Tuesday, matching the median forecast of economists. Separate figures showed wages fell for a seventh month this year, offering little hope that higher pay might fuel consumption over the coming months. Consumer spending has supported Japan’s economy this year as the U.S.-China trade war and a cooling of tech demand weighs on global demand and Japanese exports. The Bank of Japan, which meets this month amid expectations for more easing, will be watching how shoppers respond to the 2 percentage point sales-tax hike that took effect Oct. 1. The last increase in 2014 triggered a spending boom before the hike that was followed by a bust that caused the economy to shrink more than 7% the next quarter. This time around, a raft of government measures, including tax breaks on house and car purchases, have helped soften the boom-bust cycle, but economists still forecast a 2.7% contraction in 4Q GDP. “I don’t think we’re going to see the kind of dent in consumer spending that we saw in 2014,” said Takeshi Minami, chief economist at Norinchukin Research Institute. “But the relatively softer numbers now are also related to a weak underlying trend in consumer spending, which is worrisome because it’s only going to get worse after the tax hike.” Consumers are in an increasingly gloomy mood. Confidence dropped in September to its lowest level since June 2011, according to government figures published last week.”
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