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On 30 January 2019 - US stocks surge after Fed promises to be patient

Anne D Picker

Anne D Picker - Econoday

ADP report points to strong US employment growth but European data show further weakness.

US markets

US stocks made strong gains Wednesday, with investment sentiment early in the day supported by company news and the ADP employment report and then boosted further late in the session by the Federal Reserve’s assurance that it will be “patient” before raising rates again. The Dow closed up 1.8 percent on the day, while the S&P advanced 1.6 percent and the Nasdaq rose 2.2 percent.

The Federal Reserve left policy settings on hold at the conclusion of its FOMC meeting Wednesday afternoon, in line with the consensus forecast. Holding its federal funds target in the 2.25 to 2.50 percent range, the FOMC adjusted its guidance for the policy outlook, saying it “will be patient” ahead of its next rate move given slowing global growth and “financial developments”. Officials’ assessments of both inflation and the economy, in keeping with the moderating stance, have been downgraded. Inflation pressures are now described as “muted” and economic activity as “solid” not “strong” as at the last FOMC meeting in December. As expected, and what is a clear note that policy appears to be settling into a quiet phase, the wording for “some further gradual rate increases” has been cut. Wording that risks are “roughly balanced” has also been cut.

Speaking after the meeting, Fed Chairman Jerome Powell described the current policy stance as a “wait-and-see approach” and acknowledged "the case for raising rates has weakened somewhat." He noted that the unwinding of the Fed's balance sheet is in its “final stages” but would not directly confirm a final target size of $3.5 trillion, as many estimate. The Fed's balance sheet currently stands at $4.1 trillion.

GDP data scheduled for release Wednesday was delayed by the recently-concluded government shutdown. The ADP employment report indicates that private payrolls will increase by 213,000 in January, above the consensus forecast range of 142,000 to 185,000. Last month, the ADP report indicated an increase of 271,000 compared with the official estimate of 301,000. Pending home sales fell 2.2 percent on the month in December, indicating the weakness in final home sales recorded in December looks set to extend into the new year.

After reporting fourth-quarter earnings just above analysts’ expectations after the New York close Tuesday, Apple posted strong gains on Wednesday. Boeing also surged after it reported fourth-quarter earnings of US$5.48 per share, well above estimates of US$4.57 per share. The company delivered 806 commercial aircraft in 2018 and expects to deliver around 900 in 2019, providing full-year earnings guidance of around US$20.00 per share compared with the estimate of US$18.31.

US-China trade negotiations began in Washington DC Wednesday, with officials yet to make public comments. Tariff rates on Chinese goods are scheduled to increase from 10 percent to 25 percent at the start of March unless a deal can be reached, with US officials seeking progress on issues such as market access and intellectual property protection.

These data reflect observations at 4:00 PM US ET. Gold gained US$8.70 to US$1,323.90 and dated Brent spot crude was up US$0.44 to US$61.76. The US dollar was broadly steady ahead of the Fed announcement but has since weakened sharply and is now down on the day against most major currencies but flat against the Swiss franc. The yield on the US Treasury 30 year bond was steady at 3.04 percent while the 10 year note fell 3 basis points to 2.68 percent.

European markets

European markets were mixed Wednesday, with trading volumes reported to be low ahead of key risk events including the Fed announcement and US-China trade talks. The FTSE outperformed, up 1.6 percent, largely reflecting strong gains by large exporters after the pound weakened following the Brexit vote in the UK parliament. The CAC also made a solid gain, up 0.9 percent on the day, but the DAX fell 0.3 percent.

The UK parliament endorsed late Tuesday the government’s bid to re-open Brexit negotiations with the European Union on the arrangements covering the land border between the UK and the Republic of Ireland. Parliament also voted in favour of ruling out the “no deal” option for leaving the EU. With the EU still insisting that it is not prepared to negotiate any changes to the existing deal ahead of the scheduled Brexit late March, the prospect of a delayed or “no deal” Brexit remains a key concern for investors. Prime Minister Theresa May is seeking to present a revised deal to parliament by mid-February.

French data showed GDP grew 0.4 percent in the three months to December after an increase of 0.3 percent in the three months to September, with year-on-year growth slowing from 1.5 percent to 0.9 percent. Civil unrest and new rules on vehicle emissions likely contributed to weaker household consumption and business investment, though this was partly offset by stronger exports growth.  In annual terms, French GDP grew 1.5 percent in 2018, down from 2.3 percent in 2017. Preliminary German CPI data showed a fall in headline inflation from 1.7 percent in December to1.4 percent in January, its lowest level since November 2016.

Asia Pacific Markets

Asian markets were mixed Wednesday ahead of the Fed decision and US-China trade talks. The Shanghai Composite index underperformed, down 0.7 percent on the day, while Japanese markets also closed lower, with the Nikkei and Topix down 0.5 percent and 0.4 percent respectively. Korea’s KOSPI index closed up 1.0 percent, boosted by strong gains from tech companies such as Samsung and SK Hynix, while Hong Kong’s Hang Seng index and Australia’s All Ordinaries index also posted moderate gains.

Australian data published Wednesday showed a small drop in headline inflation from 1.9 percent in the three months to September to 1.8 percent in the three months to December. This fall was mainly driven by lower global oil prices, with underlying measures of inflation steady, suggesting the data will have little impact on officials’ assessment of the inflation outlook. Nevertheless, with headline inflation below the Reserve Bank of Australia’s target range of 2.0 percent to 3.0 percent, markets are pricing in a greater chance of a rate cut by the end of the year even though officials have argued that they believe the next rate move is more likely to be an increase.

Looking forward

Japanese industrial production and Chinese PMI data will be published shortly. US-China trade talks are scheduled to conclude Thursday. The European data calendar is crowded Thursday, with highlights include flash GDP and unemployment for the Eurozone, French CPI, and German unemployment. US personal income and outlays data may be delayed.

Global Stock Markets

 

Index

30 Jan 2019

Daily Change

% Change Daily

North America

 

 

 

 

United States

Dow

25014.86

434.90

1.8

 

NASDAQ

7183.08

154.79

2.2

 

S&P 500

2681.05

41.05

1.6

Canada

S&P/TSX Comp

15484.55

21.41

0.1

Europe

 

 

 

 

UK

FTSE 100

6941.63

107.70

1.6

France

CAC

4974.76

46.58

0.9

Germany

XETRA DAX

11181.66

-37.17

-0.3

Italy

MIB

19771.55

69.95

0.4

Spain

Ibex 35

9071.50

-47.60

-0.5

Sweden

OMX Stockholm 30

1509.50

6.78

0.5

Switzerland

SMI

8965.71

25.19

0.3

Asia/Pacific

 

 

 

 

Australia

All Ordinaries

5951.16

11.62

0.20

Japan

Nikkei 225

20556.54

-108.10

-0.5

 

Topix

1550.76

-6.33

-0.4

Hong Kong

Hang Seng

27642.85

111.17

0.4

S. Korea

Kospi

2206.20

22.84

1.0

Singapore

STI

3174.38

-13.31

-0.4

China

Shanghai Comp

2575.58

-18.67

-0.7

Taiwan

TAIEX

9932.26

0.67

0.0

India

Sensex 30

35591.25

-1.25

0.0

* Market closed
Source — Haver Analytics

 

 

 

 Note: all releases are listed in local time.

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