China, Yen, Sweden Observations, US-German Rate Update

China is the main talking point today. In an unusual move China brought forward by a couple of days the release of its CPI and industrial production figures from September 13 to tomorrow September 11. The shift to a weekend release is even more unusual and it has set the chins wagging.

There is speculation the data will be strong, especially the CPI, and that they PBOC needs this for “fundamental cover” to hike rates before the markets open on Monday. While acknowledging no compelling explanation for the shift, the speculation seems a bit of a stretch. Such “cover” is unnecessary. China reported today that property prices in August rose 9.3% from a year ago, which is the slowest pace in six months. The yuan did rally, perhaps helped by such speculation; perhaps helped by the rapprochement that seems to be the outcome of the US senior official visit. China also reported August trade figures. The $20.03 bln surplus was considerable smaller than the market expected (~$27 bln) and the July surplus of $28.7 bln.

The surprise was both on the export side (less) and the import side (more). Those advocating a tougher line against China in the US Congress may emphasize that August was the third consecutive monthly surplus above $20 bln. Ahead of the November midterm US elections, this may play well in media. The reluctance of the Obama Administration, like the Bush and Clinton Administrations before it, to cite China as a manipulator of the foreign exchange market, and its more recent decision not to support fresh sanctions on Chinese aluminum because the hidden subsidy of an undervalued currency has raised the ire.

Today is also a notable day for China because despite the sharp upward revision in Japanese Q2 GDP, it appears that it is then that it has moved into second place in terms of economic size. Japan’s Q2 GDP was revised to 1.5% from 0.4% as widely expected following the recent data that showed stronger capex. The dollar value of Japan’s GDP in Q2 was $1.295 trillion while China’s was $1.337 trillion.

In purchasing power terms China has been the world’s second largest economy for several years. Capital expenditures were indeed revised sharply higher in Japan’s revised estimate of GDP. The initial estimate of 0.5% was revised to 1.5%. There was little change in most of the other components. Lastly, deflation pressures make it more difficult to see what is happening in Japan. In nominal terms, unadjusted for prices, the Japanese economy contracted by 0.6% in Q2.

The string of favorable news from Sweden continued today. July industrial production had been expected to rise a healthy 0.7% in July and instead jump 2.9% and the June data was revised to show a 1.3% rise instead of 1.1%. The year-over-year rate stands at 14.4% up from 12.4%. The forward looking industrial orders were also good. The 5.6% rise more than offsets the downwardly revised 2.7% decline in June. The krona was bid to fresh two year highs against the euro.

Over the past three months, the krona has been one of the few currencies that have more than kept pace with the Japanese yen. Though it has lagged more recently, it does look poised to play some catch-up. In contrast the data from Norway continues to point to a flagging of momentum. Today it reported a 0.2% decline in August consumer prices. It is the fifth consecutive monthly decline. The Swedish krona is also poised to extend gains against its Norwegian counterpart.

One of the themes I have emphasized has been how well the US-German 2-year yield differential has tracked the euro-dollar exchange rate, especially in months. One reason we have turned a bit more cautious on our euro outlook is that that interest rate differential has stopped moving in the US favor as it did most recently since late July. The peak was recorded on August 25 when the US offered “only” 7 bp less than Germany. The euro’s recent low was recorded on August 24. The differential stands at 17 bp in German’s favor today. That is the most since August 19. This may not mean the euro will rally. The sovereign and bank capital requirements continue to weigh on sentiment toward the single currency. While doubts about the US economic outlook and the interest rate differential considerations suggest a broad trading affair.