Macro narratives this morning focus on threats and ultimatums. Russia is expected to retaliate in the coming days against sanctions imposed by the West in connection to the geopolitical situation in eastern Ukraine. The Bank of England released a letter addressed to Andrew Tyrie, the chair of the U.K. Treasury Select Committee, in which Bank governor Mark Carney outlined the reality that if it wants to maintain a pegged currency, an independent Scotland would need to hold much greater foreign currency reserves than it stands to inherit in a separation from the U.K. Meanwhile, U.S. allies have yet to weigh in on what specific support they will provide after President Barack Obama announced the plans for targeted air strikes against the Islamic State in Iraq and Syria (ISIS). Despite geopolitical brinksmanship at the forefront of investors’ minds, for the most part, financial markets remain calm as the trading week draws to a close.
Andean nations cut benchmark rates. Policymakers at the central banks of both Chile and Peru reduced benchmark lending rates in a signal that sluggish Andean economic activity is outweighing inflation concerns. Chile cut its benchmark rate by one quarter of a point to 3.25 percent and Peru, also by a quarter point to 3.50 percent, the lowest rate for both countries in three years. Both nations have seen softer copper prices and cooling demand growth from China weigh on those countries’ critical mining sectors, even as consumer prices continue to trend upward moderately in recent months.
Putin backed into a corner. The Russian ruble again reached new record lows versus primary currencies today, extending its loss versus the U.S. dollar to 2 percent for the week to date. With broader European Union and U.S. sanctions going into effect, including limiting financing for 15 key companies, expectations are for the government of President Vladimir Putin to take punitive actions in response.
U.S. consumer spending numbers on deck. The U.S. Census Bureau is set to release August retail sales data today at 8:30 am U.S. Eastern time, with consensus forecasts for a 0.6 percent rise from July’s measure. Both July and June’s data releases were softer than forecast, largely on the back of softening automotive activity, despite marginal expansion of core sales. Preliminary September levels will be issued for the University of Michigan’s consumer sentiment index this afternoon, with expectations for an increase for a third consecutive month.
Chinese shadow banking is in the spotlight. Official Chinese media outlets today reported that Evergrowing Bank Co. has racked up to $650 million in potential losses from off-balance-sheet loans guaranteed by the lender. This is the latest acknowledgment of troubled loans in the shadow banking segment of the Chinese financial market, which continues to come under increasing regulatory scrutiny.
Portfolio Perspective: Another Consumption Tax Hike in Japan is Almost Certain — Takuji Aida, Société Générale Securities
Japan’s weak second-quarter gross domestic product growth confirmed that the negative impact of the consumption tax hike in April was greater than initially expected. The Bank of Japan also underestimated the extent of the economic contraction that would arise from the tax hike, as indicated by the bank’s optimistic 1.0 percent growth projection for fiscal-year 2014 (April 2014 to March 2015). Regarding the price outlook, the question is whether inflation actually will be able to accelerate again during the latter half of fiscal-year 2014. In our view, the chances of this are low. Against this backdrop, we expect additional quantitative and qualitative easing (QQE) measures to be implemented when the actual consumer price index data proves to be weaker than the Bank of Japan’s inflation outlook.
Prime Minister Shinzo Abe is expected to make the final decision to implement the second stage of the consumption tax hike — to raise the tax from 8 percent to 10 percent in October 2015 — as scheduled. Given that the consumption tax hike was initially proposed more as a way of meeting political policy objectives rather than strictly economic objectives, if third-quarter results show even the slightest bit of positive economic growth, Abe will likely go ahead with the hike. In our view at Société Générale Securities, the government is likely to introduce further economic stimulus measures to offset the downside risks of the second consumption tax hike and as a result, the chances of Japan falling into recession are low.
Takuji Aida is the chief economist for Société Générale Securities in Tokyo.
