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On 2 May 2019 - Hawkish policy signals on inflation; global stocks move lower

Anne D Picker

Anne D Picker - Econoday

Bank of England lifts inflation target.

US markets

Stocks closed moderately lower for a second session with the Dow down 0.5 percent and both the S&P and Nasdaq down 0.2 percent.

Prior expectations that the next rate move by the Federal Reserve was more likely to be down not up continue to soften after yesterday's FOMC meeting. Concerns over global slowing that had been common earlier in the year are easing in light of improving economic growth in Europe and continued strength in Asia underscored by last week's 6.4 percent showing for Chinese GDP. The downplaying of sub-target core inflation by the Federal Reserve yesterday was followed today by a small inflation upgrade by the Bank of England.

Economic news was led by a much better-than-expected jump in productivity to a 3.6 percent pace in the first quarter that drove down unit labor costs by 0.9 percent. The mix reflected a sharp rise in output against only modest rise for wages.

In company news, Caterpillar fell despite raising its dividend, while Under Armour rose sharply on quarterly results. Tesla also rose sharply on news of a share and note offering, while Kellogg fell after sacking its chief financial officer and posting lower earnings. Beyond Meat, the maker of the Beyond vegan burger, made its debut with a very strong gain.

These data reflect observations at 4:00 PM US ET. Dated Brent spot crude was down US$1.68 to $70.46 while gold was US$5.60 lower at $1,270.90. The US dollar slightly firmed against most currencies; it was unchanged against the yuan. The yield on the US Treasury 30-year bond rose 3 basis points to 2.94 percent while the yield on the 10-year note was up 4 basis points at 2.54 percent.

European markets

Shares across Europe were lower including a 0.9 percent decline for the CAC and a 0.5 percent decline for the FTSE's. Spain's Ibex lost 1.6 percent while Italy's MIB fell 0.8 percent.

The Bank of England kept rates unchanged and stuck to its tightening bias though uncertainty over Brexit is expected to keep policy sidelined. But the bank did upgrade its inflation projection that puts the CPI at 2.05 percent in the second quarter of 2021 and at 2.16 percent in the same period in 2022, pointing to higher rates ahead.

In economic news, German retail sales fell 0.2 percent in March yet first-quarter sales were a solid 1.6 percent above their level in the fourth quarter when they rose 0.7 percent versus third quarter.  Except for a 3.0 percent monthly slump in December, which was all but reversed in January, retail demand has been on a steadily rising trend since September. Other economic data included a sub-par 47.9 PMI score for German manufacturing in April and a slight uptick in the UK's construction PMI.

SAP fell on reports of a flaw in its security software. Austrian engineering company Andritz fell sharply after cutting forecasts citing weak auto demand, while German drugmaker Bayer rose sharply after receiving a favorable ruling by the U.S. Environmental Protection Agency that glyphosate, an ingredient in Bayer’s Roundup weed killer, is not a carcinogen. Volkswagen rose sharply after hitting forecasts.

Asia Pacific Markets

Asian equities were mixed but mostly lower Thursday with financials hit hardest by disappointment over the Federal Reserve's stand-pat policy stance. Reported progress on US-China trade talks, and regional purchasing managers data were positives, along with a ratings upgrade for the Philippines from Standard & Poor's.

The Singapore Straits index fell 0.2 percent, as financials felt the brunt of the Fed disappointment. DBS Group Holdings led the way down with a decline of 2.3 percent. Australia's All Ordinaries index declined 0.6 percent as financials and mining shares led the decline. National Australia Bank fell 0.3 percent after disappointing earnings and a dividend cut. BHP Group and Rio Tinto led a drop in the mining sector. Hong Kong's Hang Seng index rose 0.8 percent on news suggesting progress toward a US-China trade deal, led by financials and the property sector. Mainland Chinese and Japanese markets remained on holiday.

Several news reports said the US and China are nearing a deal to roll back tariffs imposed by the US on more than $250 billion in Chinese goods, and on the terms of a broader trade pact, to be finalized next week in Washington, D.C.

Asian manufacturing purchasing managers' data suggested resilience and modest growth. The Nikkei South Korea PMI rose to a six-month high of 50.2 in April from 48.8 in March, above the expected 48.5. Lifting the PMI were rises in the three major sub-components, new orders, output and employment. Production volumes broadly stabilized.

The Nikkei/Markit ASEAN PMI rose to 50.4 in April, a five-month high, from 50.3 in March, suggesting modest growth across the seven-nation region. "This was precipitated by a quicker, albeit still marginal, rise in new orders that was supported by the first increase in export sales since last July," Markit said. "Five of the seven monitored countries saw business conditions strengthen in April, with three of these recording quicker growth than in March. Myanmar continued to head the rankings, registering the joint-sharpest rise in production for a year."

Looking forward

Reports on the consumer climate and the CPI will be posted in Switzerland with the CIPS/PMI services report coming out of the UK. Eurozone consumer and price data will also be posted. In the US, the employment report for April will lead the day's data that will also include the goods trade deficit for March and the ISM non-manufacturing index.

Global Stock Markets



2 May 2019

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*Markets closed




Data Source — Haver Analytics




Note: all releases are listed in local time.

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