Market Update

It has been a bustling week filled with crucial data and economic events, despite several markets being closed (Japanese markets were closed all week; Chinese markets were closed for three days, and most European markets were closed on Wednesday, May 1, 2019).
China’s PMI data slightly weakened, with the manufacturing PMI reading dropping to 50.1 (from 50.5 in March). Although the reading remains just above 50, signaling expansion, we suspect the data might be poor enough to actually be good news, indicating that the Chinese central bank, the PBOC, might provide further stimulus to the economy.
In the US, as anticipated, the Fed left interest rates unchanged during its meeting on Wednesday, May 1, 2019, despite calls from Donald Trump to cut US interest rates by 1%.
However, the subsequent press conference hosted by the Fed Chairman, Jay Powell, was our main focus after the Fed’s recent U-turn and dovish shift on interest rates (the so-called “Powell Pause”).
Our main question was whether the recent strong economic data would push policymakers back toward increasing interest rates or whether the continuing weak inflation would push officials into endorsing an interest rate cut (on Monday, April 29, 2019, the Fed’s preferred underlying inflation measure, the PCE, was flat on the month and stood at 1.6% – well below the central bank’s 2% target).
Regrettably, in the end, the Fed adopted a neutral stance, stating that they didn’t “see a strong case for moving [interest rates] in either direction” as they believe the factors currently depressing core inflation are “transitory”.
However, we have heard the Fed dismiss low inflation as transitory many times before!
We maintain our view that there has been a generic shift down in inflation. Hence, our long-held perspective that this will be one of the loosest tightening cycles ever, signifying a very shallow path of interest rate increases with the peak point for interest rates well below historic averages.
Much of the other data from the US was mixed. For instance, this week’s ISM reading displayed a significant slowdown from 55.3 in March to 52.8 in April – the lowest reading since October 2016. And while the economy created 263,000 new jobs, the average hourly earnings were weaker than expected at 3.2%.
Meanwhile, in the UK, the BoE also left interest rates unchanged following Thursday’s, May 2, 2019, monetary policy meeting. Although the BoE adopted a slightly more hawkish tone by stating that it would increase UK interest rates if there was a smooth Brexit, they have not convinced us that an interest rate increase is imminent. In our opinion, any increase would be a policy error given household debt levels.
Looking ahead, we have another interesting week to anticipate, including UK Q1 GDP and industrial production; US CPI, PPI, and trade data; Eurozone retail sales; and Chinese CPI and foreign reserves data.