The pace of job creation in the US remains satisfactory, while the unemployment rate declined further to a 17-year low
The Fed maintained its policy rate at 1.75%, as expected, on May 2nd. It is likely to resume its cycle of rate hikes on June 13th, on the basis that inflation has “moved close to” instead of “run below” the 2% target and with the unemployment rate at 3.9% (see Economics).
The EC maintained its 2018 euro area GDP growth estimate unchanged at 2.3% yoy compared with February, as it believes the slowdown in Q1 GDP was temporary (+1.6% qoq saar versus +2.7% qoq saar in Q4:17). Nevertheless, the EC deem that risks to the outlook are tilted on the downside from balanced previously. Trade tensions are a key factor.
The S&P 500 was broadly stable on a weekly basis (-0.4% ytd), with strong corporate earnings offsetting the stronger US Dollar and geopolitical concerns (Iran) (see page 3). In local currency terms, the DAX30 was up by 1.9% wow (-0.8% ytd) and +8.8% off its low in late March, supported by a weaker EUR and some positive news regarding trade.
US Financials have struggled ytd relative to the market (-2% underperformance), despite rising interest rates. A flatter 10/2 curve (by 7 bps to 45 bps) and decelerating bank loan growth weighs. On the other side of the Atlantic, euro area banks have also lagged (-1.1% vs Eurostoxx: +2.4%), with Greek banks at +7.3% ytd. Alpha, Eurobank and NBG confirmed that the stress test results did not point to capital shortfalls and no capital plan was deemed necessary as a result of the exercise, while Piraeus Bank is expected to proceed with its existing capital strengthening plan.
Emerging market equities declined by -1.7% wow due to a stronger USD and higher US rates. Intra-EM, S&P downgraded Turkey’s credit rating to BB- from BB, with a stable outlook (Moody’s: Ba2, Fitch: BB+), due to high and rising inflation (+10.9% yoy in April) and deteriorating external performance in view of sharp currency depreciation (Turkish Lira: -4.6% wow | - 11.5% ytd versus the US Dollar to $4.229, a record low). Turkish equities fell by 4.7% wow (-11.0% ytd).
Note that Turkey’s non-financial corporates are highly exposed to currency devaluation risks as circa 50% of their debt is denominated in foreign currency ($305 bn or 36% of GDP). Turkey has very high external financing needs (28% of GDP, on average, in 2018/2020). Yields on Turkish government bonds rose sharply in the past week (10Yr – USD denominated: +52 bps wow to 6.52% | +93 bps ytd).
The US Dollar continued to strengthen in the past week (DXY Index: +1.1% wow | +3.5% since mid-April 2018), as the economic slowdown in major peers (euro area, UK, Japan) has led to a dovish tilt from their central banks, also feeding through, inter alia, to higher interest rate differentials. Indeed, the 2Yr UST minus the 2Yr German Schatz yield spread rose to 308 bps - a record high.
Oil prices increased in the past week (Brent: +1.4% wow) and even further on Monday (Brent: +0.8% to $75.5/barrel) – a record high since November 2014. Market attention has now turned to the decision of the US (expected on May 8th) regarding the extension of the current waiver on the sanctions imposed on Iran regarding its nuclear program (initially implemented in January 2016).