May 24, 2018
United States:
Stocks Rebound as Fed Says No Reason to Rush Rates: Markets Wrap
U.S. stocks clawed back early losses to trade higher after minutes from the most recent Federal Reserve meeting showed central bankers in no hurry to accelerate the pace of rate hikes even as the economy continues to improve. Yields on 10-year Treasuries briefly dipped below 3 percent, while the dollar climbed. All major equity benchmarks rose despite escalating geopolitical fears following President Donald Trump’s decision to back away from a recently announced trade agreement with China. The dollar climbed as investors got a mixed picture on the health of U.S. consumers from a host of retailer earnings. Tiffany & Co. surged as sales blew away estimates, while Target Corp. tumbled after its profit missed forecasts. “Although we have a lot of market noise around trade and North Korea and Middle East, the fundamental picture is still bright,” said Anthony Saglimbene, global market strategist at Ameriprise Financial. “Earnings are growing, the Fed is still accommodative, inflation levels are still very modest. That is all positive for stock prices over the next six to 12 months.” For traders, the monetary policy chatter was a welcome break from the geopolitical back-and-forth. Trump appeared to express pessimism on a planned summit meeting with North Korean leader Kim Jong Un, and the U.S. president kept up his attacks on Special Counsel Robert Mueller’s investigation, warning of a “scandal the likes of which this country may never have seen before.” Meanwhile, in Italy questions are swirling around the populist government’s economic policies.
Europe:
German Exports Drop Most Since 2012 as Trade Damps Growth
German exports fell the most in more than five years at the start of 2018, holding back growth in Europe’s largest economy. A breakdown of first-quarter gross domestic product data showed foreign sales fell 1 percent, the most since 2012. Imports also declined, and net trade knocked 0.1 percentage point off GDP. “The drop in exports could be a first sign that the appreciation of the euro in 2017 has started to leave its mark on the economy,” said Carsten Brzeski, an economist at ING-Diba in Frankfurt. But “strong private consumption, the pick-up of investments and low inventories still bode well for the German growth outlook.” The euro has gained more than 11 percent against the dollar since the start of 2017. It was up 0.3 percent at $1.1732 as of 11:35 a.m. Frankfurt time. The euro-area economy also experienced a slowdown in the first three months of 2018. Despite assurances by European Central Bank officials that weakness would be temporary, the region’s PMI showed a further loss of momentum in May. ECB chief economist Peter Praet was unfazed on Thursday. “There are clouds, but economic conditions are good,” Praet said at a conference in Brussels. The trailing off in indicators is attributable in part to supply constraints, he said, adding that the rallying euro is probably the cause of some of the slowdown. The German GDP report showed government spending also slipped in the first quarter. Overall economic growth — confirmed at 0.3 percent — was supported by consumer spending and capital investment. After the first-quarter slowdown — partly blamed on bad weather — surveys this month suggest an immediate rebound isn’t yet assured. Germany’s composite purchasing managers index of private-sector activity fell to a 20-month low in May. Despite the flurry of weaker numbers, the Bundesbank has maintained its view that growth will pick up again in the second quarter, ensuring that the country’s boom will continue. Siemens AG has raised its outlook for full-year earnings amid “impressive” digital business. German food wholesaler Metro AG, on the other hand, has cut its outlook for earnings-per-share growth this year, citing a stronger euro. The single currency gained more than 14 percent in 2017. Looking ahead, risks to the outlook are manifold. President Donald Trump announced his administration is investigating import tariffs on cars and trucks — a measure that would hit Germany hard. The U.S. is the largest export market for luxury cars manufactured in Germany ahead of the U.K. and China, according to German auto industry association VDA.
U.K. Retail Sales Bounce Back in April as Weather Warms Up
U.K. retail sales rebounded more than expected in April as the spring weather lured shoppers into stores. Sales climbed 1.6 percent from March, compared with a median estimate of a 0.9 percent gain in a Bloomberg survey. The surge was led by fuel, household goods and clothing, according to data from the Office for National Statistics in London. After cold weather hit sales at the start of the year, the Bank of England is looking out for a recovery in consumption as it debates when to next raise interest rates. Britons are just now emerging from a year of shrinking real incomes after the vote to leave the European Union battered the pound and stoked inflation. The pound climbed after the report, rising 0.5 percent to $1.3409 as of 9:36 a.m. in London. Some stores reported that the weather had made a difference in April in getting people back into the shops, the ONS said. Clothing retailer Next Plc said this month that sales surged amid warm weather and it raised its full-year profit forecast. Despite the bounceback in April, the longer-term trend is more subdued. Over three months, sales gained 0.1 percent from the previous period, the ONS said. Combined sales in April and March increased 1.3 percent from a year earlier, compared with a 2.9 percent pickup a year ago. “Over the longer-term, retail sales growth has slowed considerably, with increases in food, household goods and internet retailers being largely offset by declines across all other types of retailing,” said Rob Kent-Smith, head of national accounts at the ONS.
Asia:
China’s Trade Deal With U.S. Leaves Germany Squeezed in Middle
Chancellor Angela Merkel heads to China with another U.S.-prompted headache threatening to hurt German interests. China’s pledge to buy more American goods as part of a deal to avert a trade war with the U.S. puts Germany on the spot. As China’s biggest European trading partner, with a total volume of some $179 billion last year, Germany is first in line to suffer the impact of any reduction in business. “China will buy more and more products from the U.S. that we might have otherwise bought from Europe or other partners,” said Wang Yiwei, director of Renmin University’s Institute of International Affairs in Beijing, and a former Chinese diplomat in Brussels. “This will certainly have a spillover effect.” The upshot is a complex balancing act for the chancellor, as she champions open trade and the multilateral system, knowing that China is failing to allow reciprocal access to its markets while targeting strategic interests across Europe. On the other axis is the U.S. under Donald Trump, whose protectionist moves are straining the trans-Atlantic bond and preventing a common front against China’s trade transgressions.