Pessimistic Mood in the Marketplace

May 23, 2019

A protracted U.S.-Sino trade war looks increasingly unavoidable. No light can be seen at the end of the Brexit tunnel, and paralyzing tensions between the Trump White House and Congressional Democrats keep intensifying. Although a preliminary estimate that German GDP accelerated to 0.4% last quarter, the May IFO Institute index of Germany’s business climate produced a 54-month low, revealing a continuing lack of momentum. French business sentiment stayed flat in May, and PMI data released today reflect the negative impact of protectionism on manufacturing. FOMC minutes were not quite as dovish as many analysts were expecting, and the South African Reserve Bank’s unchanged policy stance was decided by a split vote, with two dissents favoring a cut.

Stocks faltered today, with drops in Asia of 1.9% in Hong Kong, 1.4%^ in China and Taiwan, 0.8% in India and 0.6% in Japan. The Dow Jones Industrials opened more than 1.0% lower, and equity declines thus far in European markets amount to 1.5% in Germany and France, 1.7% in Italy, 1.2% in the U.K., and 1.0% in Spain.

The 10-year British gilt and U.S. Treasury yields fell by four and three basis points, while their German counterpart slipped two basis points.

On evidence of an unexpected rise in U.S. crude inventories, West Texas Intermediate oil  dropped 3.2%, sliding below the $60 per barrel level for the first time in two months. Gold firmed 0.4%.

The dollar and yen have been well bid. The dollar shows gains of 0.4% against the euro and loonie, 0.2% relative to the yuan, Aussie dollar and sterling and 0.1% vis-a-vis the kiwi, but the greenback is 0.3% softer versus the yen.

German GDP, despite the aforementioned 0.4% quarterly rise last quarter, was only 0.6% stronger than a year earlier. Corrected for variation in the number of business days, on-year growth amounted to 0.7%, down from 2.1% in the years to both 1Q18 and 1Q17. Over the latest four quarters, net foreign demand exerted nearly a one percentage point drag on growth, offsetting the combined growth contribution from personal consumption and government expenditures.

According to preliminary information, Euroland’s composite purchasing managers index edged up 0.1 point to a 2-month high of 51.6. But service sector activity grew at the slowest pace in four months, and manufacturing contracted for the fourth time in a row in May. The German and French PMIs printed at 52.4 and 51.3, indicating similarly moderate rates of growth.

Japan’s flash estimate of the manufacturing purchasing managers index slid back under the 50 no change level to a 3-month low of 49.6.

The Commonwealth Bank of Australia reported a 6-month high of 52.2 in its compiled Australian composite and service sector purchasing manager indices. The CBA manufacturing PMI edged up 0.2 points to a 2-month high but still tepid 51.1 reading.

The German IFO Institute’s business climate index slumped 1.3 points to 97.9, the weakest reading since November 2014. It did this despite a 2-month high of 100.6 in current conditions. The weakness was in expectations was concentrated in services.

CPI inflation in Hong Kong accelerated 0.8 percentage points in April to a 14-month high of 2.9%, and CPI inflation in Singapore rose 0.2 percentage points to a 23-month high of 0.8%.

Norwegian joblessness last quarter of 3.5% was at an 11-quarter low.

The composite U.S. IHS-compiled composite purchasing managers index sank to a 3-year low of 50.9 in May, indicating scant pulse, from 53.0 in April. Manufacturing’s reading plunged to a 10-year low, and service sector activity dropped to a 39-month low.

U.S. new home sales relapsed 6.9% in April following March’s 11-1/2 year high to a 2-month low in April of 673k.

U.S. new jobless insurance claims last week of 211k were little changed from the prior week’s total, but the four-week average, 220-1/4k, was 14k above the previous four-week average through April 20.

By a vote of 3 to 2, South Africa’s Monetary Policy Committee chose to leave its central bank repo rate unchanged at 6.75%. Two committee members favored a 25 basis point cut, whereas the previous meeting in last March, which also kept the interest rate unchanged, had been decided unanimously. According to a released statement, a 6.75% repo rate level constitutes an accommodative stance, and forward guidance suggests there is likely to be one cut of 25 basis points within the coming year. Projections of CPI inflation this year and next, which were previously made in February, were revised downward to 4.5% and 5.1%, respectively. Although officials foresee inflation cresting at 5.5% a year from now, they anticipate such subsiding back to 4.5% by the second half of 2021. The statement observes that expected inflation has been moderating and assess growth risks around a baseline forecast of 1.0% this year and 1.8% in 2020 to be skewed to the downside. The last change in the repo rate was a 25-basis point hike in November, which reversed a 25-basis point cut in March 2018.

Copyright 2019, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



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