The greenback is holding near an eight-month low as the impact of yesterday’s Chinese stimulus announcement dissipates and an unexpectedly-extreme fall in US consumer sentiment takes a toll on risk appetite. Equity market futures are setting up for a softer open and front-end Treasury yields are pushing slightly lower, even as long-term rates continue their ascendance.
The Conference Board’s consumer confidence index tumbled by the most in three years in September. The headline index dropped 6.9 points to 98.7, well below economist estimates, as households reported a deterioration in current conditions and turned more pessimistic on the future. The share of respondents saying that jobs were plentiful fell for a seventh month to 30.9 percent, while the share reporting that it has become hard to get a job climbed to 18.3 percent. The “labour market differential” – the gap between the two measures – narrowed sharply, mirroring patterns that have historically preceded large rises in unemployment – and economic downturns.
The Chinese renminbi is holding near a one-year high, but gains are fading after the central bank unleashed a large-scale stimulus effort aimed at stabilising property markets and reinvigorating “animal spirits” in the economy. The offshore yuan briefly broke the 7-to-the-dollar threshold last night on optimism surrounding the package – which includes reductions in bank reserve ratios, liquidity support for equity markets, and cuts in mortgage interest rates – but a sense of scepticism is reasserting itself as investors worry that a lack of fiscal follow-through will limit the impact on the real economy.
Options pricing suggests traders have nonetheless adopted a starkly-asymmetric outlook on the yuan over the next year, with upside gains – moves into the high 6’s – seen as substantially more likely than renewed weakness. We would take a more cautious view – although yesterday’s actions are strongly indicative of more support to come, the central bank is unlikely to welcome the export-hampering effects of a strong rally in the exchange rate, and could act to slow its rise. More broadly, until authorities bolster social safety nets and address imbalances in the household share of China’s national income, the psychological shock delivered by the slow-motion implosion in property prices is unlikely to be fully unwound.
The euro is trading almost unchanged relative to the greenback – and isn’t far off cycle highs – but problems are brewing under the surface. Survey data is pointing to an economic slowdown ahead, with France dealing with a post-Olympics retrenchment even as industrial-sector weakness pushes the German economy closer to a technical recession, making it likely that the European Central Bank could soon face pressure to ease policy at a faster pace.
Political dysfunction is also shining a spotlight on the spectacular run-up in French indebtedness. With major powerbrokers in the ruling coalition remaining far apart on how to address spending overages and revenue shortfalls, the government budget deficit is seen reaching 6 percent of economic output this year – twice as high as the European Union’s budget rule – and the gap between French and German bond yields has almost doubled relative to where it stood ahead of July’s snap election. Overall debt-to-gross-domestic-product ratios are well above levels reached in Italy before the euro crisis more than a decade ago, and are set to rise further in the months ahead, suggesting that the common currency’s political-risk discount could return at some point soon.
