Market update (30 April 2018)

Apr 30, 2018 Written by Gavin Pannu, MSTA, CFTe

The UK GDP slipped to 0.1% in the first quarter of 2018, down from 0.4% in the fourth quarter of last year and the slowest level since the final three months of 2012. UK consumer confidence remains subdued, its main index fell back to -9 in April, from -7 in March.

There was much debate over whether the UK should stay in or out of a customs union following Brexit. Ten pro-European Conservative MPs had already signed an amendment that called on Britain to stay in a customs union, a move intended to maintain frictionless trade with the EU and to help ensure there is no return to a hard border in Ireland.

The euro weakened against major currencies after the European Central Bank struck a dovish tone. The bank did not adjust interest rates but kept its promise to buy bonds under its quantitative easing programme until the end of September and keep interest rates at their current record lows potentially past the end of their asset purchases.

The Bank of Japan did not change interest rates, but ditched a timeframe it had set for hitting an inflation target.

The yield on US ten-year Treasury bonds broke through 3% this week. Whilst this level has psychological significance to market participants in terms of the broader economy, it does not represent a meaningful tightening of financial conditions. Dollar bulls were cheering after the US currency strengthened over the week following a period of weakness. 

North and South Korean leader held a peace summit raising hopes of a new era of trust on the peninsula. Kim Jong-Un broke with decades of hostility and distrust to become the first North Korean leader to cross into South Korean territory since 1953.

Results from Facebook were positive. Net income rose by more than 60% and earnings came in 25% higher than Wall Street expected. Google reported an 84% increase in first-quarter profits, beating analysts expectations. Amazon profits came in at $9.4bn compared with a consensus estimate of $6.56bn. Amazon shares hit all-time high after the statement.

This week:

US Core PCE Price Index: Monday.

This is a measure of inflation by the Federal Reserve and has a different formula than the CPI. The Core CPI rose in March to an annual rate of 2.1% from 1.8% beforehand as base effects were removed. Therefore, a rise in the y/y level of the Core PCE is likely from 1.6% previously. The Fed’s target is 2%.

Australian rate decision: Tuesday.

The Reserve Bank of Australia is expected to leave the interest rate unchanged at 1.50%. The institution led by Governor Phillip Lowe has not changed the rates since 2016 and has said it is firmly on hold for the time being. The RBA will likely be delighted with the recent slide in the A$ but disappointed with the unimpressive quarterly inflation and the not-so-great jobs report.

Canadian GDP: Tuesday.

Canada is unique in publishing monthly GDP reports. The economy surprisingly shrank in January by 0.1% and is now expected to rebound in February by 0.3%. The Bank of Canada expects slow growth in Q1: 1.3% annualized according to the latest forecasts.

US ISM Manufacturing PMI: Tuesday.

The manufacturing sector is doing quite well according to the forward-looking purchasing managers index. A score of 59.3 in March is significantly above the 50-point threshold that separates expansion from contraction. The publication also serves as a hint towards Friday’s jobs report.

New Zealand jobs report: Tuesday.

New Zealand publishes labour statistics only once per quarter, giving the publication a strong impact. After a rise of 0.5% in employment in Q4 2017, a gain of 0.6% is on the cards for Q1 2018. The unemployment rate is projected to remain unchanged at a low of 4.5%.

Euro-zone GDP: Wednesday.

Euro-zone growth has slowed down according to ECB President Mario Draghi. After some of the bigger countries have reported mixed figures, the euro-zone as a whole is forecast to show a quarterly growth rate of 0.4% q/q in the first quarter of 2018 after a more robust 0.6% in Q4. A further slowdown may slow the ECB’s exit from the QE program.

ADP Non-Farm Payrolls: Wednesday.

The ADP report from the private sector is not always well-correlated with the official figure coming out two days later. This was the case in March when ADP published a gain of 241K private sector positions and the official NFP badly disappointed. This time, a more average gain of 194K is expected for April. Despite the lack of consistent correlation, the figure is always a market mover.

Fed Decision: Wednesday.

The Federal Reserve is expected to leave the interest rate unchanged at a range of 1.50% to 1.75% this time. This FOMC meeting does not include a press conference nor new forecasts. Nevertheless, the Fed publishes a statement and given the recent data, it may be quite upbeat. A rate hike in June is firmly on the cards. Jerome Powell and his colleagues will likely cement the June hike by dropping hints about such a move.

UK Services PMI: Thursday.

The services sector is the largest in the UK as in other developed economies. Markit’s forward-looking index has a significant impact on the pound. The figure fell to 51.7 points in March, indicating a major slowdown.

Euro-zone inflation: Thursday.

As of March, it stands at 1.3% y/y and is expected to remain unchanged in the preliminary read for April. However, core inflation is projected to drop from 1% to 0.9%. This may weigh on the euro and slow down the ECB’s exit from bond-buying.

ISM Non-Manufacturing PMI: Thursday.

The report for the services sector is the final hint towards Friday’s big event. The figure remained at a robust 58.8 points score in March, indicating further solid growth. A minor slowdown to 58.1 points is on the cards. The employment component provides further insight into hiring.

US Non-Farm Payrolls: Friday.

In March, the headline figure disappointed with a modest gain of 103K, well below expectations and the average 200K levels but it came after a big gain beforehand. A bounce back with 185K positions in April. The focus is set to remain on wages. Month over month, a rise of 0.2% is expected after 0.3% beforehand. Yet year over year, the same 2.7% pay raise is on the cards. Any rise towards 3% can send the US Dollar shooting higher while a deceleration towards the stubborn average of 2.5% may weigh on the dollar.