May 25, 2018
United States:
Dollar Bears Risk Another Knock-Down If U.S. Data Remain Buoyant
As the dollar’s best rally since 2016 pauses amid a lookout for fresh catalysts, key U.S. data due in the coming days will be crucial. The Federal Reserve’s preferred gauge of inflation, payrolls figures for May, first-quarter growth and personal spending are all among economic reports due next week. Should they support expectations for three more Fed interest-rate increases this year, then the dollar could extend its climb to levels that would force bears to throw in the towel on a technical basis. The Dollar Index has advanced more than 4 percent through April and May, on track for the best two-month run since November 2016. Yet, it has stalled after reaching a five-month high on Wednesday ahead of a Fibonacci retracement level as overstretched short-term positioning called for a correction. Dollar bears do have a few things to point out to back their short bias: the twin deficits haven’t gone anywhere, Treasury yields are already retreating, trade tensions are back and U.S. President Donald Trump can still negatively surprise the markets. Still, this rhetoric may sound more like hopeful thinking for greenback shorts if the U.S. remains a hot investment destination. Recent data have been buoyant and yields could resume their climb following a healthy correction, while equity valuations remain attractive amid strong U.S. earnings. Moreover, the latest geopolitical and global-trade developments may evolve just like the last time round: much noise at first, only to deescalate later.
Europe:
U.K. Economy Barely Grows as Households Rein in Spending
U.K. consumer spending lost momentum in the first quarter and companies cut investment after severe weather swept the country. Household spending rose just 0.2 percent, the weakest performance in more than three years, and business investment declined 0.2 percent as snowstorms kept shoppers at home and disrupted construction projects. Economic growth was left unrevised at 0.1 percent, the figures Friday showed, and the Office for National Statistics continued to maintain that the weather had little impact on the quarter on balance. However, that assessment was challenged this week by Bank of England Governor Mark Carney. The BOE refrained from raising interest rates this month, leaving economists and investors puzzling over whether officials will now choose to hike in August. Much depends on how quickly the economy rebounds and the evidence so far is mixed, with Brexit fears mounting and consumers only just emerging from a cost of living squeeze that has hit stores from Marks & Spencer to home- improvement chain B&Q. Consumer spending rose 1.1 percent from a year earlier, the smallest increase since the start of 2012. The quarterly fall in business investment was the first in more than a year and was driven by lower spending on non- residential buildings and vehicles, the ONS said. Construction output dropped by 2.7 percent. GDP per head fell 0.1 percent, leaving growth from a year earlier at 0.6 percent, the weakest pace since 2012. Services, the largest part of the economy, rose just 0.1 percent in March following a 0.3 percent decline in February. Growth in the first quarter was unrevised at 0.3 percent, with consumer-facing services experiencing a poor start to the year. Trade had no impact on GDP growth, as exports fell 0.5 percent from the fourth quarter and imports declined 0.6 percent. Britain is set to remain stuck in the economic slow lane again this year, with growth of around 1.4 percent trailing well behind Group of Seven peers Germany, France and the U.S.
As Europe’s Risks Flare, Everyone Piles Back Into German Bonds
A cocktail of risks across Europe means only one thing for investors seeking safety: buy German bonds. Bunds are headed for the biggest weekly gain in two years. As fiscal profligacy looms large over Rome, Spain’s Prime Minister faces a possible no-confidence vote, Turkey confronts a currency crisis and fresh trade war tension emanates from the U.S., the appeal of Germany’s debt is likely to persist. “It is perfect mix of news for the bund bulls,” said Martin van Vliet, senior interest-rate strategist at ING Groep NV. “It all very much depends on Italy. If we get fresh, worrying headlines then there is scope for bund yields to go lower.” Germany’s 10-year bonds are on course for their best week since January 2016, with yields down by 15 basis points to 0.42 percent. The premium demanded to own Italy’s debt over Germany spiked to more than 200 basis points on Friday, the highest in a year. The surge in Italian yields may leave many bondholders with non-carry-adjusted losses, according to Morgan Stanley. Losses in Spanish bonds outstripped Italy on Friday after a party that holds the balance of power in the Madrid parliament said it’s ready to back a no-confidence vote against Prime Minister Mariano Rajoy unless he calls a snap election. That sent the yield on Spain’s 10-year bonds surging 12 basis points to 1.51 percent and led peripheral euro-area spreads to widen further against bunds.
Asia:
Trump Levies Would Hit Other Asia Economies Harder Than China’s
Other Asian economies would suffer more than China’s if Donald Trump does deliver on his threats to slap $150 billion of tariffs on shipments from the world’s biggest trading nation. That’s according to Bloomberg economists Fielding Chen and Tom Orlik, who estimate that for every 10 percent drop in China’s exports, the gross domestic product growth rate of Asian economies would fall 1.1 percentage points on average. China’s would decrease by just 0.3 percentage point. While such a drop in shipments by the world’s biggest trading nation is an extreme scenario, it’s not an impossible one if Trump delivers on his tariffs threat, they said in a note Friday. Other Asian economies would be hit hard if China exports fall 10 percent and it scales back imports of components. Taiwan, Malaysia and South Korea would suffer most, with GDP growth down 1.9 percentage points, 1.3 percentage points, and 0.9 percentage point respectively, the economists estimate. Indonesia and India would likely be more resilient because they have more limited manufacturing capacity, they said. The damage would be compounded should China cut imports for domestic demand. With that factored in, Taiwan, Malaysia and Hong Kong GDP growth would fall 3 percentage points, 2.1 percentage points and 1.8 percentage points, respectively. Japan would see a 0.4 percentage point drop, a significant blow relative to expectations for GDP expansion fractionally above 1 percent. China would suffer less than many neighbors because it’s become less dependent on exports. The impact looks easy to manage given estimates of 6.5 percent growth this year, they said. The effects on other regions would generally be modest, though Chile, Germany, South Africa, Peru, Russia and Saudi Arabia have higher exposure to China’s demand, they said, citing estimates based on Organisation for Economic Cooperation and Development data.