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On 13 February 2019 - US stocks advance as inflation data strengthen the case for Fed patience

Anne D Picker

Anne D Picker - Econoday

Talks continue to avoid US government shutdown and avert increase in US tariffs on Chinese imports.

US markets

US stocks closed slightly to moderately higher Wednesday after data showed no increase in headline monthly inflation, consistent with the Federal Reserve’s assessment that it can be “patient” before raising policy rates again. Investors also remain focused on government shutdown negotiations and US-China trade talks, with the outcomes of both still unclear. The Dow advanced 0.5 percent on the day, the S&P gained 0.3 percent, and the Nasdaq rose 0.1 percent. Nasdaq underperformance partly reflected a sharp drop in Groupon after the online retailer reported late Tuesday adjusted earnings of US$0.10 per share for the fourth quarter, falling short of analysts’ expectations of US$0.13 per share. 

Inflation data showed headline consumer prices were flat on the month for a third consecutive month in January, with the year-on-year change in the index moderating from 2.0 percent to 1.6 percent. Energy prices were the main factor driving this fall in headline inflation after the big drop in global oil prices late last year, offsetting the impact of a strong labour market on consumer prices. Excluding the impact of energy prices, core consumer prices rose 0.2 percent on the month in January for a fifth consecutive month, while the year-on-year change was steady at 2.2 percent. With inflation close to the Federal Reserve’s 2.0 percent target, today’s data likely reinforce officials’ assessment that they have scope to remain “patient” before adjusting policy rates again. Comments from senior Federal Reserve officials Wednesday were in line with previous statements on economic conditions and the policy outlook.

President Trump has yet to confirm he will approve the deal made earlier in the week between Democrat and Republican lawmakers that would extend funding for the government beyond the current expiry date at the end of the week. This deal provides an amount of funds for additional border security measures well short of that sought by the Administration, prompting speculation President Trump may consider alternative ways to achieve his border objectives without precipitating another government shutdown.

Treasury Department data published Wednesday showed federal tax revenue declined 0.4 percent in calendar year 2018 after tax rates were cut in 2017, while federal spending increased 4.4 percent. The federal deficit widened from US$681 billion in 2017 to US$873 billion in 2018, with the Congressional Budget Office forecasting a deficit of US$900 billion in 2019. Republican Senator Marco Rubio voiced his support Wednesday for changes to the tax code that would treat share buybacks in the same way as dividends, arguing that favourable tax treatment of share buybacks has not provided a boost to business investment. Share buybacks have increased sharply since the 2017 cut in tax rates. Democrat senators have also in recent weeks suggested legislative changes that would restrict companies’ ability to buy back their shares.

T-Mobile fell and Sprint advanced Wednesday after their chief executives appeared before a congressional committee Wednesday to defend their merger plans. The two companies, the third and fourth largest cellphone carriers in the US, argue that the merger will not lead to job losses but will allow them to compete more effectively with larger rivals. Senior Democrat lawmakers have urged the Department of Justice and the Federal Communications Commission to block the merger.

These data reflect observations at 4:00 PM US ET. Gold closed down US$5.20 to US$1,308.80 while dated Brent spot crude advanced US$1.22 to US$63.64. The US dollar made moderate to solid gains against most other major currencies with the exception of the yuan. The yield on the US Treasury 30 year bond rose 1 basis point to 3.03 percent while the 10 year note rose 1 basis point to 2.70 percent.

European markets

Major European markets closed higher Wednesday, with the FTSE up 0.8 percent and the CAC and DAX both advancing 0.4 percent. Dutch shares advanced broadly in line with the regional trend after offsetting moves by bank ABN Amro, down sharply after it reported that loan impairments weighed on fourth-quarter earnings, and brewer Heineken, closing higher after it reported better-than-expected earnings and predicted strong 2019 results.

UK inflation data showed consumer prices fell 0.8 percent on the month in January, with the year-on-year change falling from 2.1 percent to 1.8 percent. This was the fourth consecutive fall in headline inflation and takes it below the bank of England’s 2.0 percent medium-term target for the first time since January 2017. Price pressures were weak in most major categories of spending, with the core inflation measure steady at 1.9 percent. Producer price data also showed a moderation in inflation in January, mainly reflecting the impact of energy prices. After weak GDP numbers earlier in the week, today’s data strengthen the case for the Bank of England to leave policy rates on hold for the foreseeable future.

Spain’s share market underperformed and yields on its bonds rose after its parliament rejected the government’s draft budget for 2019. Prime Minister Pedro Sanchez’s Socialist Party governs with the support of smaller regional parties, but parties from the Catalan region have withdrawn that support in protest against the government’s refusal to negotiate proposals to increase the region’s autonomy. Prime Minister Sanchez is now expected to call national elections in an attempt to secure a workable majority in parliament.     

Asia Pacific Markets

Asian markets were mixed Thursday. The Shanghai Composite index was the strongest performer in the region, up 1.8 percent on the day, while Japan’s Nikkei and Topix indices advanced 1.3 percent and 1.1 percent respectively. Hong Kong and Singapore markets recorded similar gains. Australia’s All Ordinaries index, however, underperformed with a fall of 0.1 percent, after twelve of the market’s largest 200 companies reported earnings and profits guidance, with investors on balance registering disappointment with the results. India’s Sensex index also dropped 0.3 percent on the day.

US-China trade talks continued Wednesday in Beijing but public statements on their progress have so far been limited. Reports indicate that President Xi Jinping will meet with Treasury Secretary Steven Mnuchin and Trade Representative Robert Lighthizer on Friday. The US is scheduled to increase tariffs on Chinese imports from 10 percent to 25 percent at the start of March if agreement is not reached on issues such as market access and intellectual property protection. Chinese trade data are scheduled for release Thursday and will likely show China continues to have a large bilateral trade surplus with the US.

The Reserve Bank of New Zealand left policy rates on hold at its meeting Wednesday, in line with expectations. Officials noted external risks to the outlook but retained their assessment that domestic growth and inflation will both pick up in 2019. Nevertheless, with inflation just below the mid-point of the RBNZ’s target range, officials believe that monetary policy needs to stay “supportive” and they continue to expect policy to remain on hold “through 2019 and into 2020”.

Looking forward

Japanese GDP and Chinese trade data will be published shortly, with the latter likely to show another large bilateral trade surplus with the US. Eurozone and German flash GDP reports and French unemployment data are the highlights of the European data calendar, followed by US retail sales, producer price, and jobless claims data.

Global Stock Markets

 

Index

Feb 13 2019

Daily Change

% Change Daily

North America

United States

Dow

25543.27

117.51

0.5

 

NASDAQ

7420.38

5.76

0.1

 

S&P 500

2753.03

8.30

0.3

Canada

S&P/TSX Comp

15626.73

-15.37

-0.1

Europe

UK

FTSE 100

7190.84

57.70

0.8

France

CAC

5074.27

17.92

0.4

Germany

XETRA DAX

11167.22

41.14

0.4

Italy

MIB

19989.90

184.62

0.9

Spain

Ibex 35

8982.40

-0.70

0.0

Sweden

OMX Stockholm 30

1558.58

9.17

0.6

Switzerland

SMI

9164.06

36.66

0.4

Asia/Pacific

Australia

All Ordinaries

6140.18

-8.52

-0.1

Japan

Nikkei 225

21144.48

280.27

1.3

 

Topix

1589.33

16.73

1.1

Hong Kong

Hang Seng

28497.59

326.26

1.2

S. Korea

Kospi

2201.48

11.01

0.5

Singapore

STI

3244.77

43.62

1.4

China

Shanghai Comp

2721.07

49.18

1.8

Taiwan

TAIEX

10090.58

-7.16

-0.1

India

Sensex 30

36034.11

-119.51

-0.3

Source: Haver Analytics

Note: all releases are listed in local time.

Important Information

Econoday Inc. is a US company that provides financial commentary and indicators to industry professionals. All information provided and views expressed are those of Econoday. Reference in this document to specific securities should not be construed as a recommendation to buy or sell these securities, but is included for the purposes of illustration only. Past performance is not a reliable indicator of future results. The value of investments can go down as well as up and investors may not get back the amount invested.