Over the course of this week several key US data were released. On Tuesday, the Institute for Supply Management’s Manufacturing PMI was released: it fell to 57.3 from the previous month’s 59.3 and missing market expectations of 58.3. On Wednesday, the Federal Open Market Committee (FOMC) left its target range for Fed Funds Rate unchanged at 1.5%-1.75%, as expected. Finally, on Thursday, both the Unemployment Rate and the Non-Farm Payrolls were released: the former fell to 3.9% from the previous month’s 4.1% and below market expectations of 4%, while the latter was 164k, above the previous month’s 135k but below market expectations of 192k.
On the equity side, the US market experienced some volatility, showing a negative trend until Thursday and almost completely recovering on Friday. Particularly, the S&P500 and Dow Jones Industrial Average closed on Friday 4th at 2,663.42 and at 24,262.51, respectively. Noticeably, the closing values on Thursday were 2,629.73 and 23,930.15 while those on Friday 27th were 2,669.91 and 24,311.19. In the end, the two indexes registered a WoW return of -0.24% and -0.20%, respectively.
On the fixed-income side, the yield on the 10-year US government bond dropped for the week, closing on Friday at 2.9497%, down 71 basis points from the previous Friday rate of 2.9568%.
On the currencies side, the US Dollar appreciated with respect to both the Euro and the Pound. Indeed, the EURUSD increased from 1.2130 to 1.1960 and GBPUSD decreased from 1.4092 to 1.3531.
To conclude, let’s look at the data planned to be published in the near future. In particular, investors should pay attention to the Inflation Rate (YoY) and the Core Inflation Rate (YoY) whose releases are scheduled on Thursday 10th.
Last week, however shortened by the national holiday on the first of May, brought positive results on most of the European stock exchanges. Eurostoxx 50, index that encompasses biggest players on continental market added 1.1% WoW with Nokia price, being the second largest component, increasing by 4.3%. Even greater optimism was observable in Germany with DAX getting 1.97% WoW. German manufacturers seemed to benefit from weakening Euro, however export-oriented economy tries to rebalance with the trade surplus lowered in 2017 for the first time since 2009. CAC40 delivered below average 0.37% increase WoW and closed on Friday at 5,516 points. Italy and Spain performed considerably better. FTSE MIB climbed to its highest level since 2009 reaching 24,335 points which can be explained with Italy’s stable economic growth (1.4% YoY in 1Q 2018) and improvement in the bank sector related to non-performing loans. Last but not least, IBEX 35 gained 2.1% WoW and on Friday’s closing was traded for 10104 points.
Looking on the currencies, Euro depreciated and was worth consecutively 1.1989 USD and 1.1957 CHF right before the beginning of the weekend. Common currency feels the impact of decreasing inflation rate (1.2% comparing to 1.4% forecasted for April) and one may only speculate how that will influence expected QE shutdown in September.
Treasury bonds logged rather stable week with German 10Y yield decreasing to 0.54% (-5.2% WoW), Italian 10Y noted slightly higher at 1.798% and French 10Y at 0.779%, comparing to 0.8 at the beginning of Monday’s session.
Following week will bring us important data from Germany, among others the factory orders MoM at Monday forecasted at 0.6% and the balance of trade numbers at Tuesday. On Wednesday French data on industrial production in March will be published with pessimist expectation of just 0.3% increase MoM after much better 1.2% increase in February. Also this week at Friday, Spain will release data on harmonised inflation rate in April what may prove general slowdown in eurozone inflation. 0.8% MoM rate is expected, comparing to 1.2% rate in March.
This week, the Labour party failed to make decisive gains in the local elections. This showed a little appetite for change among voters. From the macroeconomic point of view: Manufacturing PMI for the month of April fell to 53.4, lower than the 54.9 forecasted. Services PMI was also lower than expectations, at 52.8 against 53.5 forecast, raising further questions about the underlying strength of UK economy. On the other hand, Construction PMI came at 52.5, above the expected 50.5 value. UK car sales climbed 10.4% compared to the weak April a year earlier.
After the recent poor data, regarding the May hike, markets are discounting an implied probability of an increase below 10% down from the above 90% probability at the end of March.
The FTSE 100 closed on Friday at 7.569, it rose 0.89% during the week. The Pound depreciated against both the US Dollar and the Euro, respectively by 1.80% and 0.43%. It closed at 1.3530 USD and at 1.1316 EUR. The benchmark 10-year gilt yield closed the week lower at 1.40%, down 5 basis point from the previous Friday rate of 1.45 %.
Next week, on Thursday it will be realised the UK Manufacturing production for the month of March expected to be 0.2% and most importantly there will be the BoE Interest Rates decision, which is expected to remain unchanged at 0.50%.
Rest of the World
Argentina was a key source of market focus this week, as the official rate jumped from 27.25 per cent to 40 per cent in a series of interest rate increases by the central bank. It was perceived as a last-ditch effort to bolster the peso, having already spent $5bn of foreign exchange reserves. Although the currency remains down nearly 15 per cent this year against the USD, it ended Friday up 2.3% in response to the final rate hike. More generally, USD strength has been a major source of pain for EM currencies.
Among other EM currencies in focus was the Turkish Lira. Earlier during the week, S&P lowered its sovereign debt rating on Turkey further into “junk” territory, causing a sharp fall against the USD. Finally, it hit a fresh record low after consumer prices rose markedly, even after a rate rise last month designed to curb inflation.
Early during the week, Israel said it had “conclusive proof” that Iran had been hiding nuclear weapons activity. The development heightened speculation that Trump would reimpose sanctions on Tehran, supporting oil prices. Although USD strength was a drag on oil prices, Brent ended the week $74.87 a barrel, within sight of the 4-year high of around $75/barrel.
Other news was more of the same – Uncertainty over trade talks between US and China, and geopolitical concerns regarding North Korea, Syria and Iran. Most notably, a report surfaced on American demands in the China-US trade negotiations, which the Chinese officials called unfair.
Some key data releases next week include Chinese trade balance and inflation announcements, and release of Mexico’s inflation figures.
Key closing prices this week (with % weekly changes in brackets):
• Gold: $1,314 (-0.72%)
• Brent: $74.87 (0.31%)
• WTI: $69.72 (2.38%)
• USDJPY: 109.12 (0.06%)
• Nikkei 225: 22,473 (0.02%)
• HSI: 29,926 (-1.17%)