Overseas Headlines – June 5, 2018

June 5, 2018

United States:

These Shiny Economic Numbers May Be a Mirage

Friday was another strong day for U.S. economic data, with the unemployment rate falling to a new generational low. But hidden in another dataset from Friday, the widely followed Institute for Supply Management manufacturing report, is some evidence that economic bottlenecks may be producing quirks in the data, which will result in sunny reports in the second quarter but some unwelcome effects a couple months later as those bottlenecks clear. We may realize in retrospect that what looked like strong productivity growth in the second quarter actually was an early indication of inflation. That manufacturing report indicated customer inventories were at 39.6, well below a reading of 50 that indicates a balanced reading. That was the lowest level for the indicator since December 2010. At the same time, readings for new orders and prices paid were both very high, indicating strong demand and high costs for materials that go into the production of manufactured goods. The ISM noted in its summary of the report that inventory reductions were “likely caused by supplier performance issues” and “lead-time extensions, steel and aluminum disruptions, supplier labor issues, and transportation difficulties continue.”

https://www.bloomberg.com/view/articles/2018-06-04/u-s-economy-looks-more-productive-because-of-inventory-backlog

Stocks Struggle to Keep Momentum; Crude Declines: Markets Wrap

The global rally in risk assets that sent U.S. stocks to a 12-week high sputtered on Tuesday, with futures for the S&P 500 paring an advance after shares in Asia ended little changed. Treasuries rose while Italian bonds fell. Contracts for the S&P 500 had signaled the underlying gauge would extend gains following its highest finish since mid-March, but momentum faded as the open neared. After a shaky start the Stoxx Europe 600 Index advanced for a third day with technology companies and automakers leading the way. Italian bonds were poised for the first retreat since they blew up a week ago as Prime Minister Giuseppe Conte pledged in his maiden speech to pursue a program of fiscal expansion. Sterling was the stand out among major currencies, rising after the U.K. services sector — the largest part of the economy — grew more than forecast in May. The dollar climbed while the euro dropped. West Texas oil reversed a gain to head back toward $64 a barrel on a report that the U.S. government asked some OPEC members to increase production. The outlook for global equities has taken an upward turn in recent sessions, not least because stronger-than-expected data from the U.S. showed the world’s largest economy is in rude health. It’s a relief to investors after weeks of turmoil, though with President Donald Trump stepping up his aggressive trade policies and populists poised to start governing in Italy, there remain plenty of reasons for caution.

https://www.bloomberg.com/news/articles/2018-06-04/asian-stocks-seen-mixed-treasury-yields-gain-markets-wrap

Europe:

BOE Gets Big Signal U.K. Economy Is Starting to Bounce Back

The biggest part of the U.K. economy grew more than forecast in May, backing up the Bank of England’s view that a recent slump was temporary and keeping it on track for an interest-rate increase in the summer. A measure of services jumped to a three-month high of 54 from 52.8, beating the reading of 53 predicted in a Bloomberg survey. Taken with manufacturing and construction, it suggests the economy is on course for growth of 0.3 to 0.4 percent this quarter, said IHS Markit, which publishes the indexes. Expansion slowed to just 0.1 percent in the first three months of the year. The pound jumped after the report and was up 0.5 percent to $1.3379 as of 10:48 a.m. London time. For the BOE, the latest Purchasing Managers Indexes support its view that the near-stagnation at the start of the year was largely down to bad weather. Retail sales rebounded in April and separate figures Tuesday point to another strong month in May, when Britons basked in a heat wave. While the BOE held off raising interest rates in May as a precaution, it’s expected to act later this year. Policy maker Silvana Tenreyro said on Monday that the weakness was short-lived and the U.K. will need a gradual tightening over the next three years. Investors are currently pricing about 44 percent chance of a U.K. rate increase in August. Tenreyro said is that while there’s little cost to waiting one quarter to more fully assess the economy, delaying too long is a risk. In her view, “flexibility is limited.”

https://www.bloomberg.com/news/articles/2018-06-05/u-k-services-growth-quickens-amid-subdued-economic-rebound

Shortest Euro-Area Crisis Ever? Italian Risk Melts From Market

As Giuseppe Conte prepares to take the reins in Italy and macro-strategists fret the meaning of last week’s blowout in markets, the latest asset prices are signaling the worst of the panic is over. Only a week ago Italian bonds were in the throes of an unprecedented selloff, fueling a global dash to safe-haven assets as investors questioned the very survival of the euro and the likes of George Soros warned of impending doom. But while Italy braces for the first populist government in its history, sentiment appears to be turning upbeat as months of political gridlock end. “The formation of the new Italian government has provided some relief to markets,” UBS Group AG strategists including Norbert Aul wrote in a note on Tuesday. Still, “the ability of this new, inexperienced administration to govern as well as their fiscal and Europe-specific plans will face market scrutiny,” they said. The best gauge of risk in any European bond market is a comparison with yields of Germany, the continent’s safest country to lend money to. Before the recent political flare-up, Italy was paying a premium of just over 1 percentage point compared to Germany to borrow in euros for 10 years. That gap — which almost tripled last week — has dropped back to around 2.2 percentage points. As Giuseppe Conte prepares to take the reins in Italy and macro-strategists fret the meaning of last week’s blowout in markets, the latest asset prices are signaling the worst of the panic is over. Only a week ago Italian bonds were in the throes of an unprecedented selloff, fueling a global dash to safe-haven assets as investors questioned the very survival of the euro and the likes of George Soros warned of impending doom. But while Italy braces for the first populist government in its history, sentiment appears to be turning upbeat as months of political gridlock end. “The formation of the new Italian government has provided some relief to markets,” UBS Group AG strategists including Norbert Aul wrote in a note on Tuesday. Still, “the ability of this new, inexperienced administration to govern as well as their fiscal and Europe-specific plans will face market scrutiny,” they said.

https://www.bloomberg.com/news/articles/2018-06-05/shortest-euro-area-crisis-ever-italian-risk-melts-from-market

Asia:

Turkish Bonds Extend Drop as Traders Await Central Bank Decision

Turkish government bonds fell for the fifth day and the lira weakened against the dollar as investors waited to see how the central bank will set policy this week in response to a deteriorating inflation outlook. The pace of consumer-price increases climbed toward a 14-year high in May as an almost 18 percent slide in local currency this year feeds through to import prices. That’s fueling speculation that the monetary authority will have to raise interest rates for the second time in as many months when policy makers meet on Thursday. Turkish government bonds fell for the fifth day and the lira weakened against the dollar as investors waited to see how the central bank will set policy this week in response to a deteriorating inflation outlook. The pace of consumer-price increases climbed toward a 14-year high in May as an almost 18 percent slide in local currency this year feeds through to import prices. That’s fueling speculation that the monetary authority will have to raise interest rates for the second time in as many months when policy makers meet on Thursday. Officials led by Governor Murat Cetinkaya were forced into a 300-basis-point emergency rate increase in May to stem a market rout, and are said to be prepared to deliver more if inflation quickens. While last month’s move helped the lira losses, the street remains split over future policy action. Six of 11 analysts surveyed by Bloomberg expect the central bank to hold its main rate unchanged at 16.50 percent while five see a hike of 50 basis points or more. “May price data and ongoing credibility problems call for further tightening, in our view,” Yarkin Cebeci, an economist in London at JPMorgan Chase & Co., wrote in a note to clients. He is penciling in 100 basis points of policy tightening by July, and says he won’t be surprised if the bank delivers half of that at this week’s meeting. JPMorgan revised up its 2018 inflation forecast for Turkey to 11.8 percent from 10.8 percent previously, and expects the pace of price increases to peak at 13.8 percent in July. Consumer-price growth accelerated to 12.2 percent in May, nearing a high of 13 percent reached in November. The yield on 10-year government bonds jumped 19 basis points to 15.04 percent, approaching a record high of 15.30 reached on May 23. The lira slipped as much as 0.8 percent to 4.6268 per dollar.

https://www.bloomberg.com/news/articles/2018-06-05/turkish-bonds-extend-drop-as-traders-await-central-bank-decision

2018-06-05T12:34:42+00:00