Category: Markets

The purchasing managers index (PMI) for the UK construction sector dropped down to 43.1 from 48.6. Unfortunately manufacturing PMI also dropped to 48 from 49.4 and also the service sector dropped to 50.2 from 51.  It looks like the effect of a delayed Brexit is showing in the numbers.

European bond markets can breathe a sigh of relief this morning as Christine Lagarde is poised to be the new president of the European Central Bank, succeeding Mario Draghi in October.

The relief is perhaps more about who is not going to be the new president, rather than who will be at the helm; German Bundesbank chief Jens Weidman was considered to be one of the frontrunners for the post. While Draghi will be remembered for pledging to do ‘whatever it takes’ to preserve the euro, Weidman will be known for trying all he could to prevent some of Draghi’s policies being enacted.

This is now the longest uninterrupted expansion since 1854. As the central banks have injected liquidity using Quantitative Easing to keep the economy going.

Inflation in the US was 1.8% YoY in May, coming in below the consensus forecasts. Consumer price inflation slowed from the 2% pace recorded in April, which coincided with the Federal Reserve’s 2% inflation target. In addition, in core CPI inflation (a gauge that excludes volatile prices, such as fuel, etc.) also slowed to 2% YoY. Benign inflation combined with slowing growth and escalating trade tensions could increase pressure on the Federal Reserve to bow to the market and cut interest rates this year. The market now takes it for granted that the Jerome Powell-led FOMC will slash the Fed funds futures by 25 bp by the end of July and initiate an easing cycle.

The U.S. economy showed further signs of slowing as the 4Q18 GDP figure was revised down to 2.2%, which was significantly lower than the 2.6% initially reported. After business investment, consumer spending and local government expenditures were accounted for, the final GDP figure came in below economists forecast of 2.5%. The revised figure did not change the full year GDP growth rate, which remains at 2.9%.

Some good numbers for a change. More people were employed today since records began in 1971. The unemployment rate also dropped to a low of 3.9% for the first time since the dark days of the 1970’s.  

Although GDP growth in the Euro Area remained positive, the headline figure was quite disappointing, as on a quarterly basis, growth was 0.2% in 4Q18. Italy’s economic environment is deteriorating. Not only has the economy now contracted for three straight months but the banking system also proved problematic with Banca Carige entering into temporary administration.

The jobs report’s main message was that labour market tightness continued to persist in January. Non-farm payrolls rose 304,000, while unemployment rate slightly ticked up, by 0.1 ppt to 4%, as labour force participation rate rose to 63.2% – the highest reading since August 2013. As a result of the tight labour market conditions, nominal wage growth hit 3.5% YoY.
Although the unemployment rate rose to 4%, counter intuitively, its good news. It is a sign that the labour market has been improving in a more broad-based manner than before: previously inactive people (i.e. unemployed people, who were not officially registered as job searchers) re-joined the market and are actively seeking employment.

Mr. Powell delivered a speech, which signified a policy U-turn compared to his thoughts presented in December. The Fed Chair not only claimed that the FOMC is ready to pause its rate hiking cycle, but he also stated that the Committee ‘will not hesitate to make changes [to the process of balance sheet normalisation] in light of economic and financial developments.’ This was the first time that Mr. Powell publicly and openly talked about the possibility of pausing the run-off of the central bank’s balance sheet – should the environment call for it.