May 16, 2018
U.S. Economic Rebound More Tangible After Retail Data, Fed Gauge
Forecasts for a second-quarter rebound in the U.S. economy became more of a reality on Tuesday. Consumers shrugged off rising gasoline prices last month, as U.S. retail sales rose in broad fashion amid a boost to paychecks from tax cuts, a Commerce Department report showed. The value of purchases at retailers climbed 0.3 percent, matching estimates, after an upwardly revised 0.8 percent gain in March, putting consumer demand in the April-June period on an improved trajectory. A separate Federal Reserve index showed manufacturing in New York state expanded at a faster pace this month, while a private gauge of homebuilder sentiment advanced for the first time since December. The dollar and 10-year Treasury yields rose, while stocks declined, as the data fueled bets the central bank may raise interest rates three more times this year. The retail figures indicate that smaller withholdings in the wake of Republican-sponsored tax cuts, combined with a thriving labor market, are allowing households to take higher gasoline prices in stride. The upshot: A rebound in second-quarter consumer spending is becoming clearer after the slowest gain in almost five years. “Some of that energy price burden should be defrayed by the support to incomes from lower tax withholding,” Michael Feroli, chief U.S. economist at JPMorgan Chase & Co., wrote in a note. “More importantly, every indicator suggests the bedrock support of growing labor income will continue to push consumer spending forward.” Nine of 13 major retail categories showed advances in April, led by the biggest jump in sales at apparel stores since March of last year. Increased receipts were also evident at furniture merchants, building-materials outlets, non-store retailers and department stores.
Pimco Sees U.S. 10-Year Treasury Yields Topping Out at 3.5%
U.S. 10-year Treasury yields will move in a 3 percent to 3.5 percent range for the rest of the year as the Federal Reserve continues raising interest rates, said Robert Mead, co-head of Asia-Pacific at Pacific Investment Management Co. “We do think this hiking cycle is quite well advanced,” Sydney-based Mead said at the Bloomberg Invest summit in Sydney. “We also know that the backdrop of the U.S. economy has been pretty strong and going for a long time. At some point we will find these high yields will become an impediment for growth.” The yield on 10-year Treasuries has topped 3 percent and reached the highest since 2011 on Tuesday as concerns about inflation and the pace of Fed rate hikes increased. While there has been a growing consensus for higher rates this year, debate has shifted to the extent of the advance with JPMorgan Chase & Co.’s Jamie Dimon and Franklin Templeton suggesting yields are headed toward 4 percent. The bonds yielded 3.06 percent on Wednesday. Markets are pricing in two more hikes this year.
IMF Sees Risks to Europe Economic Outlook From Markets, Trade
Economic growth across Europe dropped a gear in the first quarter and the International Monetary Fund warned that threats ranging from overvalued market pricing to rising protectionism could disrupt growth. While the near-term prospects are “balanced” and the region’s economy looks strong for now, “beyond the near term, risks are clearly tilted to the downside,” the fund said in a report published on Tuesday. “The most immediate risks stem from rich valuations in financial markets at the global level, notably an exceptionally low term premium and a growing tendency toward inward-looking economic policies.” The comments come amid a debate over whether the slowdown in Europe this year will prove temporary or more persistent. Data on Tuesday showed slower-than-forecast growth in Germany, Portugal, Netherlands and the euro area as a whole in the first quarter, while a similar trend was seen in central and eastern Europe. With prospects looking less bright in the longer-term, the IMF — echoing an often repeated line — urged policymakers to seize the moment to build room for fiscal maneuver and push reforms to boost growth potential. The need is particularly pressing because central banks have little scope for easing in response to any new shocks, it said. Simmering protectionism has become a new area of concern among policymakers and businesses, who fear that a major trade war could undermine global growth. But the IMF also pointed to other external factors including a “significant slowdown” in China and geopolitical tensions.
Italian Bonds Fall While Populists Debate $300 Billion Write-Down
Italian bonds slumped as populist parties struggling to form a government discussed a potential government debt write-down worth billions of euros. League lawmaker Armando Siri told La7 television on Wednesday that the anti-immigrant League and the anti-establishment Five Star Movement are discussing a 250 billion euro ($300 billion) write-off from the European Central Bank. He was confirming an earlier report on a draft plan by the Huffington Post. The ECB is barred from directly financing governments under the Maastricht Treaty. An ECB spokesman declined to comment on the leaked draft. The yield on benchmark 10-year notes climbed above 2 percent for the first time since March on the news. “This is all fairly disruptive stuff for Italian bonds,” said Jason Simpson, a strategist at Societe Generale SA. “The markets had been assuming that they would tone down some of their more radical views.” Talks between the League led by Matteo Salvini and Five Star headed by Luigi Di Maio are dragging on. “The next hours are the ones in which we will make a decision,” Salvini told reporters in Rome Tuesday. “Either a strong government will start, or we will responsibly say we tried.” Other thorny issues include who will actually govern as neither leader has yet publicly said whom they are backing to lead the administration. Corriere della Sera reported Tuesday that Salvini and Di Maio may alternate at the helm or have different party members take turns. Di Maio responded to criticism that talks were taking too long in a Facebook video on Tuesday saying that forming a government takes time and they are working hard.