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On 6 March 2019 - US stocks decline as data show wider trade deficit

Anne D Picker

Anne D Picker - Econoday

Canadian dollar falls on BoC shift, Australian dollar falls on GDP.

US markets

US stocks posted moderate declines Wednesday with data showing a larger-than-expected trade deficit that may be pointing to a softer-than-expected employment report on Friday. The Dow fell 0.5 percent on the day, the S&P closed 0.7 percent lower, while the Nasdaq underperformed with a drop of 0.9 percent. Retailer Walgreens sold off further Wednesday after authorities identified it earlier in the week as among the major violators of laws against the sale of tobacco products to minors. General Electric also extended declines after advising earlier in the week that cash flow will be negative this year. 

International trade data showed an unexpectedly large trade deficit in December and larger revised deficits for October and November, suggesting that headline GDP growth for the three months to December will be revised lower when the final estimate is published. The deficit widened from US$50.3 billion in November to US$59.8 billion in December, reflecting both a 1.9 percent decline on the month in exports and a 2.1 percent increase in imports. Food imports were at a record high while food exports recorded their lowest monthly total since 2010, with the gap between vehicle exports and imports also contributing to the headline deficit. The annual trade deficit in 2018 was US$621.0 billion, up 12.4 percent from US$552.3 billion in 2017 and the deepest since 2008. The bilateral trade deficit with China widened from US$347 billion in 2017 to US$419 billion in 2018, suggesting that US officials will push harder for China to improve access to its markets.

The ADP report published Wednesday indicates that Friday’s payrolls report will show an increase of 183,000, at the low end of the payrolls’ consensus forecast range of 175,000 to 296,000. Mortgage Bankers’ Association data on mortgage applications in the March 1 week showed a fall in the volume of both purchased and refinance applications but an increase to a record high in the average loan size for purchase applications.

The Canadian dollar weakened Wednesday after the Bank of Canada’s policy meeting concluded with a shift in officials’ advice about the outlook for policy rates. The main policy rate was left unchanged at 1.75 percent at the meeting, in line with expectations, but officials dropped from the accompanying statement their previous advice that this rate “will need to rise over time into a neutral range to achieve the inflation target”. Officials’ assessment of near-term economic prospects seems to have weakened significantly since the most recent Monetary Policy Report in January, with exports and business investment cited as areas of concern. Lower energy prices and a wider output gap are also expected to keep core inflation slightly below the 2.0 percent medium-term target level through most of the year, significantly increasing the chances that rates will remain on hold through 2019.

These data reflect observations at 4:00 PM US ET. Gold rose US$3.30 to US$1,288.00 while dated Brent spot crude advanced US$0.05 to US$65.91. The US dollar recorded sharp gains against the Australian dollar and the Canadian dollar after weak Australian GDP data and the Bank of Canada meeting, but moves against other major currencies were negligible. The yield on the US Treasury 30 year bond fell 2 basis points to 3.06 percent while the 10 year note dropped 3 basis points to 2.68 percent.

European markets

European markets were mixed but changes were mostly subdued Wednesday ahead of the European Central Bank’s policy meeting Thursday. Officials are widely expected to lower growth forecasts and may announce a new round of cheap long-term loans for regional banks in order to stop liquidity conditions tightening as existing loans approach maturity. The FTSE outperformed with an increase of 0.2 percent while the CAC and the DAX fell 0.2 percent and 0.3 percent respectively.

Negotiations continued Wednesday between the United Kingdom and the European Union on revising the terms of their Brexit agreement, but officials reported little progress in resolving outstanding issues just three weeks before the scheduled withdrawal date, March 29. UK Prime Minister Theresa May has promised to present a revised deal to parliament by March 12 and, should this be rejected, to hold a vote on March 13 on whether the UK should withdraw with no deal in place. If this vote also fails, parliament will vote on March 14 on whether to seek to delay withdrawal. And if this vote is rejected, Brexit will proceed as scheduled with no deal in place, while if it is passed the UK government will then seek the EU’s approval to delay withdrawal. 

Asia Pacific Markets

Asian markets were mixed Wednesday. The Shanghai Composite index was the strongest regional performer, extending recent gains with an increase of 1.6 percent as investors anticipated additional policy support for the domestic economy. Japanese markets, however, fell on the day, with the Nikkei and Topix indices down 0.6 percent and 0.2 percent respectively. Indices advanced in Hong Kong, India, and Taiwan, but retreated in Korea and Singapore.

The Australian dollar fell sharply but the All Ordinaries index closed up 0.7 percent Wednesday after weak GDP data prompted investors to price in a greater chance that policy rates will be lowered later in the year. Australia's gross domestic product increased by 0.2 percent on the quarter in the three months to December, down from already subdued growth of 0.3 percent in the three months to September, and the weakest quarterly growth since mid-2016. Year-on-year growth in GDP also slowed from 2.8 percent in the three months to September to 2.3 percent in the three months to December. This decline in growth was mainly driven by residential investment, which fell 3.4 percent on the quarter after increasing 0.5 percent previously, with household consumption spending slightly stronger and government consumption spending also picking up.

Reserve Bank of Australia Governor Philip Lowe spoke shortly before the release of the GDP data and noted that domestic growth in the second half of 2018 was clearly less than in the first half, an assessment confirmed by the data. He also discussed in detail recent weakness in the housing market and contrasted this with ongoing strength in the labour market. The fall in residential investment reported Wednesday likely will reinforce concerns about the impact of the housing market but the slightly stronger increase in household consumption suggests that solid employment growth is underpinning consumers for now. Although markets priced in a greater chance of a rate cut after the GDP data, Governor Lowe repeated his assessment that the chances of the next move in policy rates being higher or lower now appear “evenly balanced”.

Looking forward

Australian trade and retail sales data will be released shortly. The European data calendar is busy Thursday, with the ECB policy meeting and the Eurozone GDP release the main highlights. Labour market indicators are the main focus of the US data calendar Thursday ahead of Friday’s payrolls report, including jobless claims and the Challenger Job-Cut Report.

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*Markets closed
Source: Haver Analytics

Note: all releases are listed in local time.

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