“The US FED Chairman’s Outlook …”

The US FED Chairman’s Outlook

FED Chairman Jerome Powell set the stage for the rate cut this month, as records from policymakers’ latest meeting show increasing fears that the US-China trade war is indirectly causing businesses to hold back on buying equipment, giving workers a raise and hiking their prices.  These factors are posing a serious risk of ending the economic expansion by pushing growth and inflation lower.  In this regard, the FED is getting closer to lower rates to take out “insurance” to ensure that this does not happen.    Lower rates could “cushion the effects” of shocks from the trade war, according to the minutes’ summary of the case for a cut.  Powell confirmed that the US economy is still under threat from disappointing factory activity, tame inflation and the trade war. The records of the FED’s rate-setting meeting, which were released shortly after Jerome Powell’s testimony before the US House of Representatives Financial Services Committee, show that those are the kind of uncertainties that “many policymakers” called out the need for a rate cut “in the near term”.

US Job Growth

US job growth rebounded strongly in June, and government payrolls surged, according to a Labour Department employment report released on 5^th July.  Nonfarm payrolls increased by 224,000 jobs last month as government employment rose the most in 10 months.  The economy created only 72,000 jobs in May.  Treasury yields on Monday were lower across maturities, with the largest moves at the long end of the yield curve.  The spread between the 2 and 10-year yields, which is the mostly used measure of the yield curve, fell to 15.8 basis points from its close on Friday at 16.9.  The yield on the benchmark 10-year note was down 2.4 basis points to 2.02 percent whilst the 30-year yield was at 2.515 percent, lower by 3.3 basis points.

US Underlying Inflation

US underlying consumer prices increased by the most in nearly 1 ½ years in June amid solid gains in the costs of a range of goods and services.  The labour Department said on Thursday its consumer price index excluding the volatile food and energy components rose 0.3 percent last month, the largest increase since January 2018.   The core CPI was boosted by strong gains in prices for apparel, used cars and trucks, as well household furnishings.  There were also increases in the cost of healthcare and rents.  In the 12 months through June, the core CPI climbed 2.1 percent after increasing 2 percent in May.  The overall CPI edged up 0.1 percent last month, held back by cheaper gasoline and food prices, increasing 1.6 percent year-on-year in June after rising 1.8 percent in May.  In another report on Thursday, the Labour Department said initial claims for state unemployment benefits declined 13,000 to a seasonally adjusted 209,000 for the week ended 6^th July, the lowest since April.  Sustained labour market strength could help support the economy, which is also showing as the massive stimulus from tax cuts and more government spending fades away.  Manufacturing is struggling, the trade deficit is widening, whilst consumer spending is rising moderately.   Although there are risks to the 10-year old expansion, the labour market remains healthy.

China’s Foreign Exchange Reserves

China’s foreign exchange reserves rose more than expected in June amid growing hopes for a trade truce with the United States which helped ease downward pressure on the yuan currency.  The yuan has been sensitive to any developments that occurred in the one-year trade war between the US and China.  This has increased the pressure on China’s already slowing economy.  The country’s foreign exchange reserves, which are the largest in the world, rose $18.23 billion in June to $3.119 trillion, data from the People’s Bank of China showed on Monday.  The yuan rose 0.6 percent against the dollar in June.  This marks its first monthly gain since February. After the release of the data, the foreign exchange regulator said that the increase in June was due to changes in currency conversion rates and asset prices.

Irish GDP

Ireland’s gross domestic product grew 2.4 percent in the first quarter of 2019 (growth 2018: 8.2 percent) and the finance minister said the momentum had continued through the second quarter.  Irish GDP has outperformed the rest of the EU every year since 2014.  The GDP data which showed output in the first quarter was 6.3 percent higher than the same period a year ago, matched with strong jobs numbers for the first three months.  The labour market added new workers at the fastest pace since Ireland’s economic recovery began.  It is close to capacity with the unemployment below 5 percent.

Italy

Italy began the sale of a new tranche of its 50-year bond launched in 2016, taking advantage of improved market sentiment after Rome avoided the EU disciplinary action over its fiscal position last week.  On Tuesday Italian bond yields fell, performing better than other European bond markets as investors welcomed the sale of more ultra-long Italian bonds at a time when assets with positive yields are increasingly hard to find.  Tuesday’s sale is the second syndicated deal for Italy in less than a month, after Rome sold 6 billion euros of a new 20-year government bond in June.  Outside Italy most eurozone bond yields rose as profit-taking on recent price gains set in as investors’ expectations turned to the possibility of the FED cutting interest rates this month amid Friday’s strong job data.

German Inflation

German annual inflation accelerated to 1.5 percent in June, remaining below the ECB target rate, showed data from the Federal Statistics Office on Thursday.  The ECB target inflation is close to but below 2 percent for the eurozone.  Inflation in the eurozone has long been below the ECB’s target rate and the European Commission on Wednesday lowered its estimates for eurozone growth and inflation, stating that uncertainty over US trade policy posed a major risk to the bloc.  The next ECB meeting will be held on 25^th July.  Whilst in its 10^th year of expansion, the German economy returned to growth between January and March, with an 0.4 percent expansion.  The Bundesbank however expects a small contraction in the second quarter.  Meanwhile, activity in the manufacturing sector is already shrinking.

Bitcoin

Bitcoin reached a two-week high on Tuesday after surging as much as 9percent overnight, a move which according to analysts was probably driven by hopes that cryptocurrencies are gaining wider acceptance amid Facebook’s disclosed plans for a digital coin.  Bitcoin touched $12,833 overnight on the Bitstamp exchange, its highest since 27^th June and gained over 45 percent since Facebook laid out plans for a digital coin.  Bitcoin remains very volatile, having gained nearly 240 percent this year after falling by three quarters last year.  Bitcoin dipped almost 8 percent on Thursday, extending losses the day after US Federal Reserve Chairman Jerome Powell called for a halt to Facebook’s Libra cryptocurrency project until issues ranging from policy to money laundering are addressed.  The proposed cryptocurrency has caused scrutiny from policymakers and financial regulators globally.  Powell said that existing rules do not fit cryptocurrencies.  On Thursday US President Trump also criticized Bitcoin, Libra (Facebook’s digital coin) and other cryptocurrencies demanding that companies should seek a banking charter and make themselves subject to US global regulations if they wanted to “become a bank”.

Markets Wrap

US stocks fell on Monday, dragged down by losses in Apple and Boeing.  Furthermore, investors cut back bets of an aggressive interest rate cut by the FED later this month.  Meanwhile, the US Treasury yield curve flattened on Monday after stronger than expected employment data released on Friday of last week led traders to significantly reduce bets on an aggressive 50 basis point interest-rate cut in July.   German shares drove Europe lower on Tuesday after a profit warning from chemicals giant BASF, citing trade friction, as the contributing factors putting chemical and automakers in the dark.  The pan-European STOXX 600 index closed 0.5 percent lower whilst most major indices were in the red.  Madrid however managed to outperform.  On Wednesday, London’s main bourse held steady following three sessions in the red as oil majors and miners offered support ahead of testimony from the US Federal Reserve Chairman.  Equities that had slumped since Friday’s strong job report rallied back to an all-time high, after the Fed Chair showed willingness to lower rates citing a slowing global economy and trade issues.  After Jerome Powell’s testimony, US stocks traded higher, with the S&P 500 .SPX briefly crossing the 3,000-point mark for the first time. On Thursday, eurozone government bond yields edged down.  Having posted the biggest one-day increase since April on Wednesday, Germany’s 10-year government bond yield dipped to minus 0.32 percent.  It is about 9 bps above record lows that hit last week.  In early trading, most other 10-year eurozone bond yields were 1-2 bps lower, as focus turned to the release of June’s ECB meeting minutes.  Meanwhile, Asian stocks gained on Thursday on the prospect of a US interest rate cut later this month.  European shares also rose breaking a four-day losing streak. US stocks also opened higher on Thursday lifted by technology stocks as the rally from the prior session empowered by the FED Chair comments.  The Dow Jones Industrial Average rose 0.33 percent at the open to 26,950.16, while the S&P 500 opened higher by 0.22 percent at 2,999.62.  The NASDAQ Composite gained 0.2 percent at the opening bell.

Oil

Oil futures hit a six-week high on Thursday as oil rigs in the Gulf of Mexico were evacuated ahead of a storm.  Meanwhile, an incident with a British tanker in the Middle East highlighted ongoing tensions in the region.  US oil producers on Wednesday cut nearly a third of Mexico crude output ahead of what could be one of the first major storms of the Atlantic hurricane season.  Oil prices were also supported by a decline in US inventories.  According to the Energy Information Administration, US crude stocks fell 9.5 million barrels in the week to 5^th July.

Gold

Spot gold rose to $1,426 per ounce, its highest since 3^rd July on expectations that the FED rate cut boosted the price of the precious metal.  Gold prices rose on Friday as concerns about the US-China trade tensions and expectations of a rate cut by the Federal Reserve boosted the demand of the safe-haven asset.  Gold has risen nearly 0.6 percent so far this week.

Currency Roundup

Tuesday saw the pound falling towards its lowest levels in more than two years against a drop of a worsening economic outlook and rising concerns about a no-deal Brexit and a new Prime Minister.  The pound also weakened against the euro to a six-month low at 89.95 pence and is on track for a tenth consecutive week of losses against the euro.  A survey from the British Retail Consortium showed on Tuesday that sales at British retailers rose at their slowest average pace on record over the past year.  Meanwhile the euro dipped below $1.12 to a three-week low against a stronger dollar, as investors re-assessed their expectations of how much the Federal Reserve may cut interest rates by this month.    On Wednesday the dollar was close to three-week high against a basket of major currencies as investors continued to unwind bets on deep US interest rate cuts, pushing higher the Treasury yields.  The direction the dollar takes was dependent on the tone the Federal Reserve Chairman Jerome Powell strikes during a two-days of Congressional testimony that started on Wednesday.   Meanwhile the EUR nudged up 0.1 percent to $1.1263 after gaining 0.4 percent on the same day.  The Australian dollar was steady at $0.6962 following an overnight rise of 0.5 percent against the broadly weaker dollar.  The surge helped the Aussie pull away from a 2 ½ week trough at $0.6910.  The dollar index steadied on Friday after falling to a near one-week low in the previous session, gaining against some of its peers on stronger US inflation data.

Malta:  Property Price Index

During the first quarter of this year, the Property Price Index (PPI) increased by 6.5 percent when compared to the corresponding quarter of the previous year.  The PPI shows the price changes of residential properties purchased by individuals.  It covers apartments, maisonettes and terraced houses only.  The price for the properties being included are deemed to be indicative of developments in the property market in general.   Provisional figures indicate that the main increase was the Apartments Price Index, although this Maisonettes price index also went up.  In the first quarter of 2018, the PPI registered an increase of 5.3 per cent when compared to the same quarter of the preceding year.

Malta – International Trade in Goods:  May 2019

Provisional figures for registered trade in goods in Malta recorded a trade deficit of EUR 199 million during May 2019 compared to a deficit of EUR 329.5 million in the corresponding month of 2018.  Both imports and exports experienced decreases of EUR 130.7 million and EUR 0.2 million respectively.  The decrease in the value of imports was primarily due to machinery and transport equipment (EUR 65.2 million), mineral fuels, lubricants, and related materials (EUR 32.1 million), food (EUR19.5 million).  On the exports side mineral fuels, lubricants and related materials (EUR 11.2 million) and food (EUR 3.9 million) were the contributing factors to the decreases, which were partly outweighed by an increase of EUR 11.2 million in chemicals.

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