May 02, 2018
The U.S. Economy Has Hit a Milestone
With the calendar’s turn from April to May, the U.S. economic expansion has become the nation’s second-longest on record. That milestone was reached as the Federal Reserve prepared to begin a two-day meeting in Washington on Tuesday. After a slow-but-steady slog over the past eight years and 10 months, most parts of the economy still look resilient. The central bank has kept borrowing costs historically low since the U.S. crawled out of a recession in mid-2009. It’s expected to leave interest rates on hold this week and plans to raise them only gradually. Meanwhile, President Donald Trump is betting on juicing growth through $1.5 trillion in tax cuts and fresh government spending. Some sectors have the potential to keep growing even as other areas may be nearing their peak. Where things go from here depends in part on how well policy makers navigate monetary policy after inflation hit their 2 percent target in March. Other hurdles include a U.S.-China trade dispute that could escalate. But if everything stays on track, the U.S. expansion would become the longest on record in July 2019, based on National Bureau of Economic Research figures that go back to the 1850s. With growth averaging just over 2 percent, this expansion has avoided major excesses, helping it keep chugging along. Demand looks fairly solid and economists see a tax-driven rebound restoring momentum after a first-quarter slowdown. Still, Trump’s goal of sustained 3 percent economic growth remains a challenge. It’s not clear if his large stimulus, which has seldom been tried at such a late stage of an upswing, will deliver as big a boost as expected. The White House argues that corporate tax cuts will lift productivity, permitting stronger growth without a pickup in inflation that might otherwise spur the Fed to raise rates at a faster pace. The Fed is reserving judgment on whether the tax cuts will yield such a supply-side benefit, though it’s also shown no indication so far of shifting to a steeper tightening path than the two or three more increases this year that officials projected in March.
Euro-Area Factories Fret About Euro as Economic Growth Cools
Euro-area economic growth slowed in the first quarter, posing a challenge for the European Central Bank as it contemplates paring back monetary stimulus measures. The 0.4 percent expansion was the weakest in six quarters and followed a reading of 0.7 percent at the end of 2017. While temporary factors such as bad weather played a part, another report showed manufacturing continued to cool this quarter and some firms are concerned about the stronger euro. Lingering economic weakness could increase caution among policy makers. ECB President Mario Draghi has acknowledged the moderation this year, though hasn’t expressed any deep concerns just yet. The European Commission may take a similar view when it updates its economic forecasts on Thursday. European Union Economic Affairs Commissioner Pierre Moscovici said last week that momentum remains “strong, solid, robust.” The numbers are “still consistent with quite good economic growth,” said Marco Valli, chief euro-area economist at UniCredit Bank in Milan. “The downward adjustment suggests a moderation in growth, but not the beginning of a downturn.” One concern is the risk of a major trade war, with the International Monetary Fund warning it could undermine global growth. EU finance chiefs sounded the alarm on Saturday after the U.S. signaled it will reject the bloc’s demand for an unconditional waiver from metals-import tariffs. The factory report from IHS Markit showed that export growth softened in April. Some companies blamed the single currency, up 10 percent against the dollar in the past year. German manufacturer Osram AG issued a profit warning late last month, citing difficult market conditions and foreign-exchange headwinds. L’Oreal SA also noted unfavorable exchange rates after a drop in reported revenue for the first quarter.
China Is Weakening Its Currency Before U.S. Trade Talks Begin
China weakened its daily currency fixing by more than traders and analysts had expected before high-ranking U.S. officials arrive in the country to discuss trade issues. The People’s Bank of China cut the reference level to 6.3670 per dollar, weaker than the average estimate of 6.3610 in Bloomberg survey of 21 traders and analysts. The deviation is the biggest since Feb. 7 and continues a pattern set in April when the fixing was weaker than expected on all but one day, according to Bloomberg calculations. “The move in the fixing today is aggressive,” said Ken Cheung, a currency strategist at Mizuho Bank Ltd. in Hong Kong. “China may want to weaken the yuan pre-emptively before the trade talks with the U.S., so that they have room to strengthen the currency” if needed, Cheung said, adding that policy makers may also be keen to arrest the yuan’s advance against a basket of peers. A U.S. delegation led by Treasury Secretary Steven Mnuchin will be in China to discuss economic and trade matters with Vice Premier Liu He on Thursday and Friday, according to state-run China Central Television. White House advisers Larry Kudlow and Peter Navarro, and Commerce Secretary Wilbur Ross will also be in Beijing in a bid to narrow the U.S. trade deficit. The PBOC will continue to weaken the fixing amid strength in the dollar as it seeks to keep the trade-weighted index stable, according to Adarsh Sinha, Hong Kong-based co-head of Asia currency and rates strategy at Bank of America Merrill Lynch. Investors will turn more bearish on the yuan under the central bank’s guidance and push the currency to as low as 6.5 per dollar in the coming two to three months, he said. The yuan fell 0.45 percent, the most since March 1, to 6.3595 per dollar as of 4:52 p.m. in Beijing, and lost 0.3 percent in Hong Kong. The official CFETS RMB Index, which tracks the Chinese currency against 24 exchange rates, was last at the highest level since April 2016.
Singapore Has Just Become Asia’s Best-Performing Stock Market
There’s been lots of competition for the title of Asia’s best-performing stock market this year. Among the major equity indexes in the region, eight have climbed to records in the first four months alone. Today, Singapore’s Straits Times Index nudged higher, boosting this year’s gain to 6.2 percent in local currency terms, and took the top spot from Vietnam’s VN Index, which plunged 2 percent. The city-state has its three big banks to thank for clinching the top spot across all major equity markets in the continent. On April 30, DBS Group Holdings Ltd., Southeast Asia’s largest lender, reported quarterly profit that beat analyst estimates helped by signs of economic growth and higher U.S. interest rates. Rivals United Overseas Bank Ltd. and Oversea-Chinese Banking Corp. report in the coming days, and could fuel further gains in the Straits Times Index. “Singapore’s stock market is very much a reflection of its open economy,” Edward Lim, chief investment officer of Covenant Capital Pte. in Singapore, said by phone. “It’s really a reflection of the mood in rates and the relatively large exposure that the Singapore stock market has on banks.” Meanwhile, Vietnam’s benchmark index has been paring advances after a 43 percent surge in the past year. The VN Index has fallen 14 percent from a record high on April 9, as investors take profit and as a spate of local share sales curbed gains. The country’s stock market more than doubled in value in the past year to $174 billion. Two of the markets which climbed to records this year — the Philippines and Indonesia — are now among the worst performers of 2018. China stock indexes in Shanghai and Shenzhen are down by more than 6 percent this year.