Fed Far From Ready to Declare Mission Accomplished on Inflation
The Federal Reserve is closing in on its elusive 2 percent inflation target but that doesn’t mean policy makers are ready to pronounce mission accomplished. The central bank’s preferred measure of inflation probably clocked in at that level last month after spending much of the past six years below target, government data due out on Monday are expected to show. “We think it’s good news but let’s not declare victory yet,” is how Ethan Harris, head of global economics research at Bank of America Merrill Lynch in New York, predicted Fed officials will react to the numbers. The uptick in inflation won’t knock policy makers off their path of gradual increases in interest rates although it will eventually prompt them to pencil in four hikes for this year, instead of the three currently forecast, said Peter Hooper, chief economist for Deutsche Bank Securities in New York. After raising rates in March, Fed Chairman Jerome Powell and his colleagues are expected to hold policy steady at a two-day meeting starting Tuesday. They won’t provide a quarterly update of their projections for the rate path until they get together again in June. Other data to be released this week probably will buttress the case for higher rates. In particular, economists are looking for payroll growth to recover to 190,000 in April from 103,000 in March while unemployment edges down to 4 percent from 4.1 percent. The jobs numbers will be announced on Friday. A hardening in expectations for Fed rate rises contrasts with signs that other central banks are taking a lower gear on the road away from easy monetary policy.
Europe Wobbles as Central Banks Rethink Stimulus: Economy Week
The European economy is wobbling after its fastest growth in a decade, prompting central bankers across to continent to ponder just how fast they want to remove monetary stimulus. This is among the topics in our weekly wrap up of what’s going on in the world economy. German business confidence slid to the lowest level in more than a year, the Ifo Institute reported this week, with sentiment also deteriorating in Italy and France. The data underscored concerns that the euro-area is hitting a soft patch with French economic growth cooling in the first quarter. At the European Central Bank, there are reasons for policy makers to be unfazed by the slowdown. President Mario Draghi is for now skirting the debate over when to end asset purchases even as some officials suggest he may now wait until July to outline a plan. The ECB isn’t alone on wondering if it’s racing away from easy money too easily. Sweden’s Riksbank pushed back a plan to raise interest rates for the first time in seven years. Bank of Canada Governor Stephen Poloz has also said more work is needed to heal the scars of the crisis, while the Bank of England has raised doubts over whether it will hike interest rates in May. The Bank of Japan maintained its stimulus program on Friday, while removing language that committed it to delivering 2 percent inflation by fiscal year 2019. Turkey this week raised its key rate by more than expected. Hungary left its unchanged, while Russia and Colombia could cut on Friday.
European Economy Loses Thrust in Risk for Global Expansion
Europe’s economy lost momentum in the first quarter as expansions slowed from France to the U.K., threatening to undermine the global growth the continent previously helped power. Figures from across the region pointed to a softer trend in the early part of the year, and U.S. first-quarter data also showed activity weakened in the world’s largest economy. Still, U.S. annualized growth of 2.3 percent beat economists’ estimates that it would slow to 2 percent. The latest numbers in Europe included a slump in French economic growth and a stabilization in euro-area sentiment after three straight declines. In the U.K., the economy came to a near halt, putting in its worst performance in more than five years. While the slowdown is partly due to storms that ripped through the region, and most officials have played it down, the European Central Bank acknowledged the shift on Thursday. If it persists, it could increase caution among policy makers about plans to pare back stimulus this year. A similar story has emerged in the U.K., where the weak data prompted investors to slash bets on an interest-rate increase in May, something once seen as a near certainty. “Manufacturing just got stung in the first quarter,” said Claus Vistesen, an economist at Pantheon Macroeconomics. “We could slow a little bit further. The question is how policy makers react to this, because policy makers, for whatever reason, are very skittish toward data on the downside.” The pound plunged more than 1 percent against the dollar on Friday amid the changing outlook for Bank of England policy. U.K. consumer confidence declined this month, with the uncertainty surrounding Brexit continuing to take a toll on the mood among households.
China’s Economy Gives Little Sign of Slowdown as PMIs Hold Up
China’s economy is giving little sign that a slowdown is approaching, with services strengthening and manufacturing remaining robust. The official manufacturing purchasing managers index stood at 51.4 in April versus the 51.3 estimate in a Bloomberg survey and 51.5 last month. The non-manufacturing PMI, covering services and construction, rose to 54.8, the statistics bureau said Monday, beating estimates. Levels above 50 indicate improvement. In the face of persistent threats to the trade outlook from a dispute with the U.S. and the impact of a credit clampdown, policy makers have expressed fears that the economy could slow more sharply than the cyclical moderation that’s already anticipated. That said, a cut in the amount of funds that lenders must park at the central bank has buoyed markets, and a mission to China by U.S. trade officials in the coming days may ease tensions. “We believe the government will manage the situation well and won’t let a trade war take place,” said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. “Domestic consumption is also resilient, and only investment — local government investment in particular — has slowed a bit, and that’s aimed at controlling debt.” A gauge of new export orders edged down to 50.7 from 51.3, though remained broadly in line with readings over the past several months. New orders also slipped, to 52.9 from 53.3. Input prices decreased slightly to 53. Inventories of finished goods, stockpiles of raw materials, backlogs of work and employment all remained about in line with prior readings. “The numbers are pretty solid,” Zhu Haibin, chief China economist at JPMorgan Chase & Co. in Hong Kong, said in a Bloomberg Television interview. “This news suggests growth momentum is still fine,” though risks still remain, he said. The statistics bureau cited steady production growth and stable demand, according to a statement released with the data.
Southeast Asian Stocks Are Set for Worst Rout Since ’16
After climbing to records this year, equities in Vietnam, the Philippines and Indonesia are now looking less like the bets that made them global winners. The MSCI Asean Index has dropped 0.5 percent this month and is poised for the third monthly decline and its longest losing streak since an 8.4 percent, four-month rout that ended in November 2016. Investors who bought Southeast Asian stocks seeking shelter from U.S.-China trade war tensions now face domestic issues that have dragged regional markets amid a surge in U.S. Treasury yields. The declines are “driven by capital markets and fund flows,” said Alan Richardson, portfolio manager at Samsung Asset Management, whose fund has outperformed 94 percent of its peers on a five-year return basis. “It won’t affect growth fundamentals. Volatility is your friend if you know how to use it.” Richardson said Vietnamese stocks have “peaked.” The VN Index climbed to a record on April 9, and it’s declined 13 percent since then. Indonesia and Thailand suffered the biggest foreign outflows in Southeast Asia from its stock markets this year over mounting domestic political and economic concerns. Prior to that, equities in the region had rallied from a 2016 low, pushing valuations to the highest since at least 2009 in January before concerns over inflation and interest rate hikes sparked a global selloff in February. The region’s stocks are still more expensive than other Asian peers currently.