In Portfolioticker today
- Today at the stock market
- The portfolio today
- Energy: Oil and Gas Futures
- EU: Balance of Payments. Q1/2018
- US: Unemployment Insurance Weekly Claims Report
- US: ADP National Employment Report. Jun 2018
- US: Services PMI. Jun 2018
- US: ISM Report on Business (PMI) – Non-Manufacturing. Jun 2018
- US: FOMC Minutes
- JPMorgan Global Services PMI. Jun 2018
- JPMorgan Global Composite PMI. Jun 2018
- Japan Update
- China Update
Today at the stock market
“Wall Street’s major indexes rose on Thursday as reports that the United States and the European Union may agree to withdraw auto tariffs fostered optimism on international trade relations among investors.
German Chancellor Angela Merkel said she would back lowering EU tariffs on U.S. car imports. An industry source told Reuters that the U.S. ambassador to Germany, Richard Grenell, had mentioned to German auto executives that U.S. President Donald Trump could abandon threatened tariffs on imported European cars if in return the European Union scrapped duties on U.S. cars.
U.S. stocks added to gains in the last hour of trading after having slightly pared gains upon the release of minutes from the Federal Open Market Committee’s Jun 2018 meeting.
The minutes reflected confidence among the Federal Reserve’s policymakers in the strength of the U.S. economy and its plans for future interest-rate hikes. In the June meeting, the Fed increased rates for the second time this year, and it has signaled that additional increases are likely.
Technology stocks led gains on the S&P 500, with shares of several chipmakers rising. The Philadelphia semiconductor index rose 2.7 percent.
“The fact that EU and U.S. officials are discussing proposals to eliminate certain tariffs on auto imports, that’s helping sentiment today and calming fears of an escalating trade war,” said Ryan Larson, head of U.S. equity trading at RBC Global Asset Management in Chicago.
Still, the Trump administration’s tariffs on $34 billion worth of Chinese imports are due to go into effect at 0401 GMT on Friday. Beijing said it would respond immediately and in equal measure on U.S. goods ranging from cars to soybeans.
There was no evidence of any last-minute negotiations between U.S. and Chinese officials, business sources in Washington and Beijing said.
Investors, however, suggested that Friday’s impending tariffs had already been priced into stocks.
“There’s a lot of uncertainty, but the markets have reacted fairly calmly and rationally. There’s been a lot of rhetoric but not a lot of actual action in terms of a trade war,” said Oliver Pursche, chief market strategist at Bruderman Asset Management in New York.
Shares of chipmaker Qorvo Inc rose 5.7% after KeyBanc, citing strong demand for smartphones in China and stabilizing iPhone sales, upgraded the company’s stock to “overweight.” Chipmaker Micron Technology Inc’s shares rose 2.6 percent after the company forecast only a small hit from a temporary ban on some sales in China.
Earlier on Thursday, the ADP National Employment Report showed private employers added 177,000 jobs in Jun 2018, below Reuters’ consensus of an increase of 190,000. That comes ahead of the more comprehensive non-farm payrolls report on Friday.” Reuters
^ S&P500 Index today (mouseover for 12 month view) [Chart: Google Finance]
|Index||Ticker||Today||Change||31 Dec 17||YTD|
|S&P 500||SPX (INX)||2,736.61||+0.86%||2,673.61||+2.35%|
^ USD and AUD denominated indices over the past 52 weeks Chart: Bunting
|Index||Currency||Today||Change||31 Dec 17||YTD|
Portfolio stock prices
|Stock||Ticker||Today||Change||31 Dec 17||YTD|
Selected Tech News Headlines
- Google opens doors of new Melbourne office, but Sydney to remain HQ: “Google has today officially opened its new office at the top end of Collins Street in Melbourne’s CBD, providing more than 100 desks for local engineers, sales and marketing staff as well as a space for the web giant to host its Victoria-based partners. Site lead Sean McDonell, who also manages Google Australia’s relationships with retail groups and utilities providers, said that Sydney will remain the company’s headquarters, despite the difficulty it has had finding a suitable second site in NSW.” SMH
^ AUD vs Bloomberg Dollar Spot Index (DXY) movements today Chart: Bloomberg
^ Bloomberg Dollar Spot Index (DXY) movements today (mouseover for 12 month view) Chart: Bloomberg
“The Bloomberg Dollar Spot Index (DXY) fell 0.2% to the lowest in more than 3 weeks.
The EUR rose 0.3% to USD 1.1691.
britain’s GBP fell 0.1% to USD 1.3221.
Japan’s JPY fell 0.1% to 110.64 per USD.
The yield on 10-year Treasuries rose less than 1 basis point to 2.8345%.
Germany’s 10-year yield fell 1 basis point to 0.299%.
Britain’s 10-year yield fell 2 basis points to 1.258%.” Bloomberg
^ AUD movements against the USD today (mouseover for 12 month view) Chart: xe.com
Oil and Gas Futures
Prices are as at 15:48 EDT
- NYMEX West Texas Intermediate (WTI): $72.94/barrel -1.62% Chart
- ICE (London) Brent North Sea Crude: $77.58/barrel -0.84% Chart
- NYMEX Natural gas futures: $2.83/MMBTU -1.29% Chart
EU: Balance of Payments. Q1/2018
Press Release Extract [eu_bop]
“The EU28 seasonally adjusted current account of the balance of payments recorded a surplus of €63.9 billion (1.6% of GDP) in the first quarter of 2018, down from a surplus of €68.0 billion (1.8% of GDP) in the fourth quarter of 2017 and up from a surplus of €43.9 billion (1.2% of GDP) in the first quarter of 2017, according to estimates released by Eurostat, the statistical office of the European Union.
In the first quarter of 2018 compared with the fourth quarter of 2017, based on seasonally adjusted data, the surplus of the goods account decreased (+€34.7 bn compared to +€41.1 bn), as did the surplus of the services account (+€47.5 bn compared to +€49.9 bn). The primary income account turned from deficit into a surplus (+€2.3 bn compared to -€1.6 bn). The deficit of the secondary income account dropped (-€20.6 bn compared to -€21.5 bn), as did the deficit of the capital account (-€1.9 bn compared to -€4.2 bn).
In the first quarter of 2018, based on non-seasonally adjusted data, the EU28 recorded external current account surpluses with the USA (+€60.8 bn), Switzerland (+€21.7 bn), Brazil (+€7.9 bn), Canada (+€7.2 bn), Hong Kong (+€6.5 bn) and India (+€0.1 bn). Deficits were registered with China (-€30.2 bn), Russia (-€12.3 bn), offshore financial centres (-€5.5 bn) and Japan (-€2.8 bn).
Based on non-seasonally adjusted data, direct investment assets of the EU28 increased in the first quarter of 2018 by €52.1 bn, while direct investment liabilities decreased by €18.0 bn. As a result, the EU28 was a net investor of direct investment in the first quarter of 2018 by €70.1 bn. Portfolio investment recorded a net outflow of €58.7 bn, and for other investment there was a net inflow of €85.8 bn.
Current account of Member States (including intra-EU flows)
As concerns the total (intra-EU plus extra-EU) current account balances of the EU28 Member States, based on available non-seasonally adjusted data, fourteen recorded surpluses, eleven deficits, one was in balance and for two data were confidential in the first quarter of 2018. The highest surpluses were observed in Germany (+€71.5 bn), Austria (+€5.3 bn), Italy (+€4.8 bn), Czech Republic (+€2.3 bn) and Sweden (+€2.2), and the largest deficits in the United Kingdom (-€23.1 bn), France (-€13.0 bn) and Greece (-€2.8 bn).”
Eurostat, “Quarterly Balance of Payments. Q1/2018“, 5 Jul 2018 More
US: Unemployment Insurance Weekly Claims Report
Press Release Extract [us_ui]
“In the week ending June 30, the advance figure for seasonally adjusted initial claims was 231,000, an increase of 3,000 from the previous week’s revised level. The previous week’s level was revised up by 1,000 from 227,000 to 228,000. The 4-week moving average was 224,500, an increase of 2,250 from the previous week’s revised average. The previous week’s average was revised up by 250 from 222,000 to 222,250.
The advance seasonally adjusted insured unemployment rate was 1.2 percent for the week ending June 23, unchanged from the previous week’s unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending June 23 was 1,739,000, an increase of 32,000 from the previous week’s revised level. The previous week’s level was revised up 2,000 from 1,705,000 to 1,707,000. The 4-week moving average was 1,718,250, a decrease of 1,750 from the previous week’s revised average. This is the lowest level for this average since December 8, 1973 when it was 1,715,500. The previous week’s average was revised up by 500 from 1,719,500 to 1,720,000 .
The advance number of actual initial claims under state programs, unadjusted, totaled 231,072 in the week ending June 30, an increase of 8,306 (or 3.7 percent) from the previous week. The seasonal factors had expected an increase of 4,778 (or 2.1 percent) from the previous week. There were 252,886 initial claims in the comparable week in 2017.
The advance unadjusted insured unemployment rate was 1.2 percent during the week ending June 23, an increase of 0.1 percentage point from the prior week. The advance unadjusted number for persons claiming UI benefits in state programs totaled 1,643,174, an increase of 57,195 (or 3.6 percent) from the preceding week. The seasonal factors had expected an increase of 27,315 (or 1.7 percent) from the previous week. A year earlier the rate was 1.3 percent and the volume was 1,867,478.
The total number of people claiming benefits in all programs for the week ending June 16 was 1,611,767, a decrease of 2,640 from the previous week. There were 1,844,632 persons claiming benefits in all programs in the comparable week in 2017.
Extended Benefits were payable in the Virgin Islands during the week ending June 16.
Initial claims for UI benefits filed by former Federal civilian employees totaled 606 in the week ending June 23, a decrease of 33 from the prior week. There were 571 initial claims filed by newly discharged veterans, a decrease of 68 from the preceding week.
There were 6,936 former Federal civilian employees claiming UI benefits for the week ending June 16, a decrease of 383 from the previous week. Newly discharged veterans claiming benefits totaled 7,556, a decrease of 31 from the prior week.
The highest insured unemployment rates in the week ending June 16 were in the Virgin Islands (2.7), Alaska (2.2), Puerto Rico (2.1), New Jersey (2.0), California (1.8), Connecticut (1.8), Pennsylvania (1.8), Illinois (1.6), Nevada (1.4), and Rhode Island (1.4).
The largest increases in initial claims for the week ending June 23 were in New Jersey (+5,436), California (+5,420), Maryland (+2,763), Kentucky (+1,968), and New York (+1,897), while the largest decreases were in Pennsylvania (-1,672), Puerto Rico (-1,234), Wisconsin (-899), Texas (-693), and Ohio (-669).“
Employment and Training Administration, “Unemployment Insurance Weekly Claims Report“, 5 Jul 2018 (08:30) More
US: ADP National Employment Report. Jun 2018
Press Release Extract [us_adp]
“Private sector employment increased by 177,000 jobs from May to June according to the June ADP National Employment Report®. The report, which is derived from ADP’s actual payroll data, measures the change in total nonfarm private employment each month on a seasonally-adjusted basis.
Comment: Ahu Yildirmaz, vice president and co-head of the ADP Research Institute: ‘The labor market continues to march towards full employment. Healthcare led job growth once again and trade rebounded nicely.’
Comment: Mark Zandi, chief economist of Moody’s Analytics: ‘Business’ number one problem is finding qualified workers. At the current pace of job growth, if sustained, this problem is set to get much worse. These labor shortages will only intensify across all industries and company sizes.’“
ADP Research Institute, “ADP National Employment Report. Jun 2018“, 5 Jul 2018 (08:15) More
US: Services PMI. Jun 2018
Press Release Extract [us_psi]
- Output expansion the second-strongest since April 2015
- Steep, but slower upturn in new orders
- Rate of input price inflation joint-quickest since September 2013
Robust June survey data indicated that the U.S. service sector enjoyed its strongest quarter for three years. The latest rise in output was the second-fastest since April 2015, behind May’s recent high. The rate of new order growth remained sufficiently strong to encourage the second-highest degree of job creation since September 2015. The rate of input price inflation meanwhile matched that seen in May and was the joint-fastest since September 2013. Output charges also increased strongly in response to robust demand.
The seasonally adjusted final IHS Markit U.S. Services Business Activity Index registered 56.5 in June. Although down slightly from 56.8 in May, the rise in output was the second-fastest since April 2015. Panellists linked the upturn to greater client demand and the acquisition of new customers. At 56.0, the average index reading in the second quarter marked the strongest quarterly expansion in three years.
New business received also increased sharply, despite the rate of increase softening to a three- month low. The pace of the latest upturn was above the series trend and widely attributed to increased referrals from current clients and favourable market conditions.
Average cost burdens faced by service providers rose sharply in June. The rate of input price inflation matched that seen in May and was consequently the joint-fastest since September 2013. Anecdotal evidence largely indicated that higher costs were associated with supplier shortages and recently introduced tariffs, accompanied by widespread reports of higher fuel prices.
Reflecting improved pricing power amid strong demand conditions, average charges rose further in June. The rate of inflation was one of the fastest in the current 28-month sequence of increase. A number of panel members noted that higher input costs were partly passed on to clients.
As the upturn in new business continued to outpace that of output, backlogs of work increased solidly. Although the rate of accumulation eased slightly from May’s recent peak, it was the second- strongest in over three years.
Meanwhile, greater business requirements drove the latest rise in employment. The rate of job creation was the second-fastest since September 2015, with some firms also noting that the launch of new products supported hiring.
Despite easing to a three-month low, business confidence regarding the year ahead remained elevated in June, driven by robust client demand and the widespsread anticipation of further order book growth.
IHS Markit Final U.S. Composite PMI™
At 56.2 in June, the final seasonally adjusted IHS Markit U.S. Composite PMI™ Output Index fell slightly from 56.6 in May. Although slightly weaker than the previous month, the overall private sector expansion was the second-fastest since April 2015 and signalled a strong end to the second quarter.
Comment: Chris Williamson, Chief Business Economist at IHS Markit
‘Another month of solid business activity growth means the second quarter saw the strongest performance from the service sector for three years. Coming on the heels of a robust manufacturing expansion in the second quarter, the survey data add to indications that the economy has picked up considerable growth momentum since the first quarter. June also saw further impressive job gains, with the manufacturing and services surveys indicating that the last two months have seen business hiring increase at the steepest rate for just over three years. At this level, the survey’s employment indices are historically consistent with a non-farm payroll rise in the order of 230k. On the downside, price pressures remained elevated, and are likely to feed through to higher consumer price inflation in coming months. There are also signs that growth could weaken in the third quarter: business expectations about future growth have pulled back from recent highs, and new order flows have slowed for two successive months. However, all indicators remain at sufficiently high levels to suggest that any slowdown may only be modest.’”
IHS Markit, “US Services PMI. Jun 2018“, 5 Jul 2018 More
US: ISM Report on Business (PMI) – Non-Manufacturing. Jun 2018
Press Release Extract [us_ism_psi]
“The NMI® registered 59.1 percent, which is 0.5 percentage point higher than the May reading of 58.6 percent. This represents continued growth in the non-manufacturing sector at a slightly faster rate.
The Non-Manufacturing Business Activity Index increased to 63.9 percent, 2.6 percentage points higher than the May reading of 61.3 percent, reflecting growth for the 107th consecutive month, at a faster rate in June.
The New Orders Index registered 63.2 percent, 2.7 percentage points higher than the reading of 60.5 percent in May.
The Employment Index decreased 0.5 percentage point in June to 53.6 percent from the May reading of 54.1 percent.
The Prices Index decreased by 3.6 percentage points from the May reading of 64.3 percent to 60.7 percent, indicating that prices increased in June for the 28th consecutive month.
According to the NMI®, 17 non-manufacturing industries reported growth.
Respondents continue to be optimistic about business conditions and the overall economy.
There is a continuing concern relating to tariffs, capacity constraints and delivery.”
The 17 non-manufacturing industries reported growth in June — listed in order — are: Mining; Construction; Wholesale Trade; Retail Trade; Public Administration; Educational Services; Real Estate, Rental & Leasing; Management of Companies & Support Services; Transportation & Warehousing; Health Care & Social Assistance; Utilities; Finance & Insurance; Arts, Entertainment & Recreation; Other Services; Professional, Scientific & Technical Services; Information; and Accommodation & Food Services. The only industry reporting a decrease is Agriculture, Forestry, Fishing & Hunting.“
Institute for Supply Management, “US Services PMI. Jun 2018“, 5 Jul 2018 More
US: FOMC Minutes
“Staff Review of the Economic Situation
The information reviewed for the June 12–13 meeting indicated that labor market conditions continued to strengthen in recent months, and that real gross domestic product (GDP) appeared to be rising at a solid rate in the first half of the year. Consumer price inflation, as measured by the 12-month percentage change in the price index for personal consumption expenditures (PCE), was 2 percent in April. Survey-based measures of longer-run inflation expectations were little changed on balance.
Total nonfarm payroll employment expanded at a strong pace, on average, in April and May. The national unemployment rate edged down in both months and was 3.8 percent in May. The unemployment rates for African Americans, Asians, and Hispanics all declined, on net, from March to May; the rate for African Americans was the lowest on record but still noticeably above the rates for other groups. The overall labor force participation rate edged down in April and May but was still at about the same level as a year earlier. The share of workers employed part time for economic reasons was little changed at a level close to that from just before the previous recession. The rate of private-sector job openings rose in March and stayed at that elevated level in April; the rate of quits edged up, on net, over those two months; and initial claims for unemployment insurance benefits continued to be low through early June. Recent readings showed that increases in labor compensation stepped up over the past year. Compensation per hour in the nonfarm business sector increased 2.7 percent over the four quarters ending in the first quarter of this year (compared with 1.9 percent over the same four quarters a year earlier), and average hourly earnings for all employees increased 2.7 percent over the 12 months ending in May (compared with 2.5 percent over the same 12 months a year earlier).
Total industrial production increased at a solid pace in April, but the available indicators for May, particularly production worker hours in manufacturing, indicated that output declined in that month. Automakers’ schedules suggested that assemblies of light motor vehicles would increase in the coming months, and broader indicators of manufacturing production, such as the new orders indexes from national and regional manufacturing surveys, continued to point to solid gains in factory output in the near term.
Consumer spending appeared to be increasing briskly in the second quarter after rising at only a modest pace in the first quarter. Real PCE increased at a robust pace in April after a strong gain in March. Although light motor vehicle sales declined in May, indicators of vehicle demand generally remained upbeat. More broadly, recent readings on key factors that influence consumer spending—including gains in employment, real disposable personal income, and households’ net worth—continued to be supportive of solid real PCE growth in the near term. In addition, the lower tax withholding resulting from the tax cuts enacted late last year still appeared likely to provide some additional impetus to spending in coming months. Consumer sentiment, as measured by the University of Michigan Surveys of Consumers, remained elevated in May.
Residential investment appeared to be declining further in the second quarter after decreasing in the first quarter. Starts for new single-family homes were unchanged in April from their first-quarter average, but starts of multifamily units declined noticeably. Sales of both new and existing homes decreased in April.
Real private expenditures for business equipment and intellectual property appeared to be rising at a moderate pace in the second quarter after a somewhat faster increase in the first quarter. Nominal shipments of non-defense capital goods excluding aircraft rose in April, and forward-looking indicators of business equipment spending—such as the backlog of unfilled capital goods orders, along with upbeat readings on business sentiment from national and regional surveys—continued to point to robust gains in equipment spending in the near term. Real business expenditures for nonresidential structures appeared to be expanding at a solid pace again in the second quarter, and the number of crude oil and natural gas rigs in operation—an indicator of business spending for structures in the drilling and mining sector—increased, on net, from mid-April through early June.
Nominal federal government spending data for April and May pointed to an increase in real federal purchases in the second quarter. Real state and local government purchases also appeared to be moving up; although nominal construction expenditures by these governments edged down in April, their payrolls rose at a moderate pace, on net, in April and May.
Net exports made a negligible contribution to real GDP growth in the first quarter, with growth of both real exports and real imports slowing from the brisk pace of the fourth quarter of last year. After narrowing in March, the nominal trade deficit narrowed further in April, as exports continued to increase while imports declined slightly, which suggested that net exports might add modestly to real GDP growth in the second quarter.
Total U.S. consumer prices, as measured by the PCE price index, increased 2.0 percent over the 12 months ending in April. Core PCE price inflation, which excludes changes in consumer food and energy prices, was 1.8 percent over that same period. The consumer price index (CPI) rose 2.8 percent over the 12 months ending in May, while core CPI inflation was 2.2 percent. Recent readings on survey-based measures of longer-run inflation expectations—including those from the Michigan survey, the Survey of Professional Forecasters, and the Desk’s Survey of Primary Dealers and Survey of Market Participants—were little changed on balance.
Incoming data suggested that foreign economic activity continued to expand at a solid pace. Real GDP growth picked up in the first quarter in several EMEs—including Mexico, China, and much of emerging Asia — although recent indicators pointed to some moderation in the pace of activity in most EMEs. By contrast, in the advanced foreign economies (AFEs), real GDP growth slowed in the first quarter, owing partly to temporary factors such as labor strikes in some European countries and bad weather in Japan. More recent indicators pointed to a partial rebound in AFE economic growth in the second quarter. Inflation pressures in the foreign economies generally remained subdued, even though higher oil prices put some upward pressure on headline inflation.
Staff Review of the Financial Situation
During the intermeeting period, global financial markets were buffeted by increased concerns about the outlook for foreign growth and political developments in Italy, but these concerns subsequently eased. On net, Treasury yields were little changed despite significant intra-period moves, and the dollar appreciated notably as a range of AFE and EME currencies and sovereign bonds came under pressure. However, broad domestic stock price indexes increased, on net, as generally strong corporate earnings reports helped support prices. Meanwhile, financing conditions for nonfinancial businesses and households remained supportive of economic activity on balance.
Over the intermeeting period, macroeconomic data releases signaling moderating growth in some foreign economies, along with downside risks stemming from political developments in Italy and several EMEs, weighed on prices of foreign risk assets. These developments, together with a still-solid economic outlook for the United States, supported an increase in the broad trade-weighted index of the foreign exchange value of the dollar.
The dollar appreciated notably against several EME currencies (primarily those of Argentina, Turkey, Mexico, and Brazil), as the increase in U.S. interest rates since late 2017, along with political developments and other issues, intensified concerns about financial vulnerabilities. EME mutual funds saw slight net outflows, and, on balance, EME sovereign spreads widened and equity prices edged lower. In the AFEs, sovereign spreads in some peripheral European countries widened and European bank shares came under pressure, as investors focused on political developments in Italy. Broad equity indexes in the euro area, with the exception of Italy, ended the period little changed, while those in Canada, the United Kingdom, and Japan edged higher. Market-based measures of expected policy rates were little changed, on balance, and flight-to-safety flows reportedly contributed to declines in German longer-term sovereign yields.
FOMC communications over the intermeeting period— including the May FOMC statement and the May FOMC meeting minutes—elicited only minor reactions in asset markets. Quotes on federal funds futures contracts suggested that the probability of an increase in the target range for the federal funds rate occurring at the June FOMC meeting inched up further to near certainty. Levels of the federal funds rate at the end of 2019 and 2020 implied by overnight index swap (OIS) rates were little changed on net.
Longer-term nominal Treasury yields ended the period largely unchanged despite notable movements during the intermeeting period. Measures of inflation compensation derived from Treasury Inflation-Protected Securities were also little changed on net.
Broad U.S. equity price indexes increased about 5 percent, on net, since the May FOMC meeting, boosted in part by the stronger-than-expected May Employment Situation report. Stock prices also appeared to have been buoyed by first-quarter earnings reports that generally beat expectations—particularly for the technology sector, which outperformed the broader market. However, the turbulence abroad and, to a lesser degree, mounting concerns about trade policy weighed on equity prices at times. Option-implied volatility on the S&P 500 at the one-month horizon—the VIX—was down somewhat, on net, remaining just a couple of percentage points above the very low levels that prevailed before early February. Over the intermeeting period, spreads of yields on nonfinancial corporate bonds over those of comparable-maturity Treasury securities widened moderately for both investment and speculative grade firms. However, these spreads remained low by historical standards.
Over the intermeeting period, short-term funding markets stayed generally stable despite still-elevated spreads between rates on some private money market instruments and OIS rates of similar maturity. While some of the factors contributing to pressures in short-term funding markets had eased recently, the three-month spread between the London interbank offered rate and the OIS rate remained significantly wider than at the start of the year.
Growth of outstanding commercial and industrial loans held by banks appeared to have moderated in May after a strong reading in April. The issuance of institutional leveraged loans was strong in April and May; meanwhile, corporate bond issuance was weak, likely reflecting seasonal patterns. Gross issuance of municipal bonds in April and May was solid, as issuance continued to recover from the slow pace recorded at the start of the year.
Financing conditions for commercial real estate (CRE) remained accommodative. Even so, the growth of CRE loans held by banks ticked down in April and May. Commercial mortgage-backed securities (CMBS) issuance, in general, continued at a robust pace; although issuance softened somewhat in April, partly reflecting seasonal factors, it recovered in May. Spreads on CMBS were little changed over the intermeeting period, remaining near their post-crisis lows.
Residential mortgage financing conditions remained accommodative for most borrowers. For borrowers with low credit scores, conditions stayed tight but continued to ease. Growth in home-purchase mortgages slowed a bit and refinancing activity continued to be muted in recent months, with both developments partly reflecting the rise in mortgage rates earlier this year.
Financing conditions in consumer credit markets were little changed in the first few months of 2018, on balance, and remained largely supportive of growth in household spending. Growth in consumer credit slowed a bit in the first quarter, as seasonally adjusted credit card balances were about flat after having surged in the fourth quarter of last year. Financing conditions for consumers with subprime credit scores continued to tighten, likely contributing to a decline in auto loan extensions to such borrowers.
Staff Economic Outlook
In the U.S. economic forecast prepared for the June FOMC meeting, the staff continued to project that the economy would expand at an above-trend pace. Real GDP appeared to be rising at a much faster pace in the second quarter than in the first, and it was forecast to increase at a solid rate in the second half of this year. Over the 2018–20 period, output was projected to rise further above the staff’s estimate of its potential, and the unemployment rate was projected to decline further below the staff’s estimate of its longer-run natural rate. Relative to the forecast prepared for the May meeting, the projection for real GDP growth beyond the first half of 2018 was revised down a little in response to a higher assumed path for the exchange value of the dollar. In addition, the staff continued to anticipate that supply constraints might restrain output growth somewhat. With real GDP rising a little less, on balance, over the forecast period, the projected decline in the unemployment rate over the next few years was a touch smaller than in the previous forecast.
The staff forecast for total PCE price inflation from 2018 to 2020 was not revised materially. Total consumer price inflation over the first half of 2018 appeared to be a little lower than in the previous projection, mainly because of slightly softer incoming data on nonmarket prices, but the forecast for the second half of the year was a little higher, reflecting an upward revision to projected consumer energy prices over the next couple of quarters. The staff continued to project that total PCE inflation would remain near the Committee’s 2 percent objective over the medium term and that core PCE price inflation would run slightly higher than total inflation over that period because of a projected decline in consumer energy prices in 2019 and 2020.
The staff viewed the uncertainty around its projections for real GDP growth, the unemployment rate, and inflation as similar to the average of the past 20 years. The staff saw the risks to the forecasts for real GDP growth and the unemployment rate as balanced. On the upside, recent fiscal policy changes could lead to a greater expansion in economic activity over the next few years than the staff projected. On the downside, those fiscal policy changes could yield less impetus to the economy than the staff expected if, for example, the marginal propensities to consume for groups most affected by the tax cuts are lower than the staff had assumed. Risks to the inflation projection also were seen as balanced. The upside risk that inflation could increase more than expected in an economy that was projected to move further above its potential was counterbalanced by the downside risk that longer-term inflation expectations may be lower than was assumed in the staff forecast.
Participants’ Views on Current Conditions and the Economic Outlook
In conjunction with this FOMC meeting, members of the Board of Governors and Federal Reserve Bank presidents submitted their projections of the most likely outcomes for real GDP growth, the unemployment rate, and inflation for each year from 2018 through 2020 and over the longer run, based on their individual assessments of the appropriate path for the federal funds rate. The longer-run projections represented each participant’s assessment of the rate to which each variable would be expected to converge, over time, under appropriate monetary policy and in the absence of further shocks to the economy. These projections and policy assessments are described in the Summary of Economic Projections, which is an addendum to these minutes.
In their discussion of the economic situation and the outlook, meeting participants agreed that information received since the FOMC met in May indicated that the labor market had continued to strengthen and that economic activity had been rising at a solid rate. Job gains had been strong, on average, in recent months, and the unemployment rate had declined. Recent data suggested that growth of household spending had picked up, while business fixed investment had continued to grow strongly. On a 12-month basis, overall inflation and core inflation, which excludes changes in food and energy prices, had both moved close to 2 percent. Indicators of longer-term inflation expectations were little changed, on balance.
Participants viewed recent readings on spending, employment, and inflation as suggesting little change, on balance, in their assessments of the economic outlook. Incoming data suggested that GDP growth strengthened in the second quarter of this year, as growth of consumer spending picked up after slowing earlier in the year. Participants noted a number of favorable economic factors that were supporting above-trend GDP growth; these included a strong labor market, stimulative federal tax and spending policies, accommodative financial conditions, and continued high levels of household and business confidence. They also generally expected that further gradual increases in the target range for the federal funds rate would be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term. Participants generally viewed the risks to the economic outlook as roughly balanced.
Participants reported that business fixed investment had continued to expand at a strong pace in recent months, supported in part by substantial investment growth in the energy sector. Higher oil prices were expected to continue to support investment in that sector, and District contacts in the industry were generally upbeat, though supply constraints for labor and infrastructure were reportedly limiting expansion plans. By contrast, District reports regarding the construction sector were mixed, although here, too, some contacts reported that supply constraints were acting as a drag on activity. Conditions in both the manufacturing and service sectors in several Districts were reportedly strong and were seen as contributing to solid investment gains. However, many District contacts expressed concern about the possible adverse effects of tariffs and other proposed trade restrictions, both domestically and abroad, on future investment activity; contacts in some Districts indicated that plans for capital spending had been scaled back or postponed as a result of uncertainty over trade policy. Contacts in the steel and aluminum industries expected higher prices as a result of the tariffs on these products but had not planned any new investments to increase capacity. Conditions in the agricultural sector reportedly improved somewhat, but contacts were concerned about the effect of potentially higher tariffs on their exports.
Participants agreed that labor market conditions strengthened further over the intermeeting period. Nonfarm payroll employment posted strong gains in recent months, averaging more than 200,000 per month this year. The unemployment rate fell to 3.8 percent in May, below the estimate of each participant who submitted a longer-run projection. Participants pointed to other indicators such as a very high rate of job openings and an elevated quits rate as additional signs that labor market conditions were strong. With economic growth anticipated to remain above trend, participants generally expected the unemployment rate to remain below, or decline further below, their estimates of its longer-run normal rate. Several participants, however, suggested that there may be less tightness in the labor market than implied by the unemployment rate alone, because there was further scope for a strong labor market to continue to draw individuals into the workforce.
Contacts in several Districts reported difficulties finding qualified workers, and, in some cases, firms were coping with labor shortages by increasing salaries and benefits in order to attract or retain workers. Other business contacts facing labor shortages were responding by increasing training for less-qualified workers or by investing in automation. On balance, for the economy overall, recent data on average hourly earnings indicated that wage increases remained moderate. A number of participants noted that, with the unemployment rate expected to remain below estimates of its longer-run normal rate, they anticipated wage inflation to pick up further.
Participants noted that the 12-month changes in both overall and core PCE prices had recently moved close to 2 percent. The recent large increases in consumer energy prices had pushed up total PCE price inflation relative to the core measure, and this divergence was expected to continue in the near term, resulting in a temporary increase in overall inflation above the Committee’s 2 percent longer-run objective. In general, participants viewed recent price developments as consistent with their expectation that inflation was on a trajectory to achieve the Committee’s symmetric 2 percent objective on a sustained basis, although a number of participants noted that it was premature to conclude that the Committee had achieved that objective. The generally favorable outlook for inflation was buttressed by reports from business contacts in several Districts suggesting some firming of inflationary pressures; for example, many business contacts indicated that they were experiencing rising input costs, and, in some cases, firms appeared to be passing these cost increases through to consumer prices. Although core inflation and the 12-month trimmed mean PCE inflation rate calculated by the Federal Reserve Bank of Dallas remained a little below 2 percent, many participants anticipated that high levels of resource utilization and stable inflation expectations would keep overall inflation near 2 percent over the medium term. In light of inflation having run below the Committee’s 2 percent objective for the past several years, a few participants cautioned that measures of longer-run inflation expectations derived from financial market data remained somewhat below levels consistent with the Committee’s 2 percent objective. Accordingly, in their view, investors appeared to judge the expected path of inflation as running a bit below 2 percent over the medium run. Some participants raised the concern that a prolonged period in which the economy operated beyond potential could give rise to heightened inflationary pressures or to financial imbalances that could lead eventually to a significant economic downturn.
Participants commented on a number of risks and uncertainties associated with their outlook for economic activity, the labor market, and inflation over the medium term. Most participants noted that uncertainty and risks associated with trade policy had intensified and were concerned that such uncertainty and risks eventually could have negative effects on business sentiment and investment spending. Participants generally continued to see recent fiscal policy changes as supportive of economic growth over the next few years, and a few indicated that fiscal policy posed an upside risk. A few participants raised the concern that fiscal policy is not currently on a sustainable path. Many participants saw potential downside risks to economic growth and inflation associated with political and economic developments in Europe and some EMEs.
Meeting participants also discussed the term structure of interest rates and what a flattening of the yield curve might signal about economic activity going forward. Participants pointed to a number of factors, other than the gradual rise of the federal funds rate, that could contribute to a reduction in the spread between long-term and short-term Treasury yields, including a reduction in investors’ estimates of the longer-run neutral real interest rate; lower longer-term inflation expectations; or a lower level of term premiums in recent years relative to historical experience reflecting, in part, central bank asset purchases. Some participants noted that such factors might temper the reliability of the slope of the yield curve as an indicator of future economic activity; however, several others expressed doubt about whether such factors were distorting the information content of the yield curve. A number of participants thought it would be important to continue to monitor the slope of the yield curve, given the historical regularity that an inverted yield curve has indicated an increased risk of recession in the United States. Participants also discussed a staff presentation of an indicator of the likelihood of recession based on the spread between the current level of the federal funds rate and the expected federal funds rate several quarters ahead derived from futures market prices. The staff noted that this measure may be less affected by many of the factors that have contributed to the flattening of the yield curve, such as depressed term premiums at longer horizons. Several participants cautioned that yield curve movements should be interpreted within the broader context of financial conditions and the outlook, and would be only one among many considerations in forming an assessment of appropriate policy.
In their consideration of monetary policy at this meeting, participants generally agreed that the economic expansion was progressing roughly as anticipated, with real economic activity expanding at a solid rate, labor market conditions continuing to strengthen, and inflation near the Committee’s objective. Based on their current assessments, almost all participants expressed the view that it would be appropriate for the Committee to continue its gradual approach to policy firming by raising the target range for the federal funds rate 25 basis points at this meeting. These participants agreed that, even after such an increase in the target range, the stance of monetary policy would remain accommodative, supporting strong labor market conditions and a sustained return to 2 percent inflation. One participant remarked that, with inflation having run consistently below 2 percent in recent years and market-based measures of inflation compensation still low, postponing an increase in the target range for the federal funds rate would help push inflation expectations up to levels consistent with the Committee’s objective.
With regard to the medium-term outlook for monetary policy, participants generally judged that, with the economy already very strong and inflation expected to run at 2 percent on a sustained basis over the medium term, it would likely be appropriate to continue gradually raising the target range for the federal funds rate to a setting that was at or somewhat above their estimates of its longer-run level by 2019 or 2020. Participants reaffirmed that adjustments to the path for the policy rate would depend on their assessments of the evolution of the economic outlook and risks to the outlook relative to the Committee’s statutory objectives.
Participants pointed to various reasons for raising short-term interest rates gradually, including the uncertainty surrounding the level of the federal funds rate in the longer run, the lags with which changes in monetary policy affect the economy, and the potential constraints on adjustments in the target range for the federal funds rate in response to adverse shocks when short-term interest rates are low. In addition, a few participants saw surveyor market-based indicators as suggesting that inflation expectations were not yet firmly anchored at a level consistent with the Committee’s objective. A few also noted that a temporary period of inflation modestly above 2 percent could be helpful in anchoring longer-run inflation expectations at a level consistent with the Committee’s symmetric objective.
Participants offered their views about how much additional policy firming would likely be required to sustainably achieve the Committee’s objectives of maximum employment and 2 percent inflation. Many noted that, if gradual increases in the target range for the federal funds rate continued, the federal funds rate could be at or above their estimates of its neutral level sometime next year. In that regard, participants discussed how the Committee’s communications might evolve over coming meetings if the economy progressed about as anticipated; in particular, a number of them noted that it might soon be appropriate to modify the language in the post-meeting statement indicating that “the stance of monetary policy remains accommodative.”
Participants supported a plan to implement a technical adjustment to the IOER rate that would place it at a level 5 basis points below the top of the FOMC’s target range for the federal funds rate. A few participants suggested that, before too long, the Committee might want to further discuss how it can implement monetary policy most effectively and efficiently when the quantity of reserve balances reaches a level appreciably below that seen recently.
Committee Policy Action
In their discussion of monetary policy for the period ahead, members judged that information received since the FOMC met in May indicated that the labor market had continued to strengthen and that economic activity had been rising at a solid rate. Job gains had been strong, on average, in recent months, and the unemployment rate had declined. Recent data suggested that growth of household spending had picked up, while business fixed investment had continued to grow strongly. On a 12-month basis, both overall inflation and inflation for items other than food and energy had moved close to 2 percent. Indicators of longer-term inflation expectations were little changed, on balance. Members viewed the recent data as consistent with a strong economy that was evolving about as they had expected. They judged that continuing along a path of gradual policy firming would balance the risk of moving too quickly, which could leave inflation short of a sustained return to the Committee’s symmetric goal, against the risk of moving too slowly, which could lead to a buildup of inflation pressures or material financial imbalances. Consequently, members expected that further gradual increases in the target range for the federal funds rate would be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term. Members continued to judge that the risks to the economic outlook remained roughly balanced.
After assessing current conditions and the outlook for economic activity, the labor market, and inflation, members voted to raise the target range for the federal funds rate to 1¾ to 2 percent. They indicated that the stance of monetary policy remained accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.
Members agreed that the timing and size of future adjustments to the target range for the federal funds rate would depend upon their assessment of realized and expected economic conditions relative to the Committee’s maximum employment objective and symmetric 2 percent inflation objective. They reiterated that this assessment would take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.
With regard to the postmeeting statement, members favored the removal of the forward-guidance language stating that “the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.” Members noted that, although this forward-guidance language had been useful for communicating the expected path of the federal funds rate during the early stages of policy normalization, this language was no longer appropriate in light of the strong state of the economy and the current expected path for policy. Moreover, the removal of the forward-guidance language and other changes to the statement should streamline and facilitate the Committee’s communications. Importantly, the changes were a reflection of the progress toward achieving the Committee’s statutory goals and did not reflect a shift in the approach to policy going forward.“
US Federal Reserve, “Minutes of the Federal Open Market Committee: June 12–13, 2018” 5 Jul 2018 (14:00 EDT) Minutes
JP Morgan Global Services PMI. Jun 2018
Press Release Extract [global_psi]
“Global Services PMI™ Summary:
- Output/Activity: 54.6, 54.3 (May)
- New Business: 54.9, 54.5 (May)
- Backlogs of Work: 51.5, 51.1 (May)
- Input Prices: 57.2, 56.4 (May)
- Output Charges: 52.9, 52.5 (May)
- Employment: 53.1, 52.9 (May)
- Future Activity: 64.5, 65.5 (May)
The end of the second quarter saw the upturn in the global service sector gather pace. Business activity rose at one of the fastest rates in over three years during June, as inflows of new work strengthened. The J.P.Morgan Global Services Business Activity Index – a composite index produced by J.P.Morgan and IHS Markit in association with ISM and IFPSM – posted 54.6, up from 54.3 in May.
The sharpest expansions in output were seen in the business and financial services sectors, which were also the only categories to see growth accelerate. The pace of increase in consumer services activity eased to an eight- month low.
Output expansion remained broad-based by nation, with only one of all countries covered by the worldwide services PMI survey (Brazil) seeing a contraction. The US remained the principal growth engine, despite seeing its pace of increase ease slightly from May’s recent high. The euro area and the UK were also both robust contributors to the expansion, with services activity rising at the fastest rates in four- and eight-months respectively.
Services output in China, Japan, India, Australia and Russia all expanded at below global-average rates. China and Japan registered accelerations, while India saw a return to expansion following a brief growth hiatus in May. The rate of increase in Russia was the slowest in over two years, while the upturn in Australia was the weakest in that nation’s 26-month survey history.
Global services new business increased a solid and slightly quicker pace in June. The expansion in new order inflows was also sufficient to test capacity, as highlighted by the steepest growth in backlogs or work since November 2013. Companies reacted by raising employment, with the pace of job creation accelerating to its joint-fastest in the past ten-and-a-half years.
Staffing levels were raised at quicker rates in the euro area, China, India and Australia. Although jobs growth eased slightly in the US, it remained close to May’s 32- month high. Slower rates were registered in Japan and the UK. Employment was reduced in Russia and Brazil.
Price pressures increased in June. Rates of inflation in costs and output charges both accelerated, with the rises signalled for both measures higher (on average) in developed nations compared to emerging markets.
Confidence remained positive in developed and emerging nations, but eased (on average) in both. Germany, the UK, Brazil, Russia and Australia were the only nations to report improved sentiment.
Price pressures gathered pace in June, with rates of inflation in output charges and input costs both accelerating. Increases in both measures were steeper in developed nations compared to emerging markets.”
J.P.Morgan and IHS Markit in association with ISM and IFPSM, “JP Morgan Global Services PMI. Jun 2018“, 5 Jul 2018 (11:00) More
JP Morgan Global Composite PMI. Jun 2018
Press Release Extract [global_composite]
“Global Manufacturing & Services PMI™
- Output/Activity: 54.2, 54.0 (May)
- New Orders: 54.3, 54.2 (May)
- Employment: 52.8, 52.6 (May)
- Input Prices: 58.6, 57.6 (May)
- Output Charges: 53.5, 53.0 (May)
- Backlogs: 51.6, 51.3 (May)
- Future Output: 63.7, 65.1 (May)
The end of the second quarter saw a mild improvement in the rate of global economic expansion. Output growth accelerated to a four-month high and was among the best over the past three-and-a-half years. The solid trend in job creation was also sustained, with the rates of increase achieved since August 2017 better than those registered throughout much of the prior decade.
The J.P.Morgan Global All-Industry Output Index rose to 54.2 in June, up from 54.0 in May. The headline index has signalled expansion for 69 consecutive months.
Please note that, due to later-than-usual release dates, manufacturing PMI data for Canada and Colombia were not available for inclusion in the June 2018 global PMI numbers.
The latest survey further highlighted a divergence in the performances of the manufacturing and service sectors. Manufacturing output growth slowed for the second successive month to its lowest since last July, partly due to the pace of increase in new export business easing to near-stagnation. In contrast, the rate of expansion in service sector activity accelerated to one of the best seen in over three years.
Developed nations (on average) outperformed their emerging market counterparts in terms of all-industry output growth in June. Rates of expansion were solid in both the US and the euro area, remaining close to May’s high in the former and accelerating in the latter. The upturns in the UK and Japan also strengthened.
Among the largest emerging nations, the performances of China and India were the most positive. In both cases growth recovered, reaching a four-month high in the former and the fastest in 20 months in the latter. The rate of output expansion was the weakest in over two years in Russia, whereas the downturn in Brazil accelerated.
June saw the rate of increase in new business improve slightly, and remain sufficiently strong to test capacity. Backlogs of work expanded in both the manufacturing and service sectors. Companies responded by raising employment, with job creation registered in the US, the euro area, Japan, the UK, India and Australia. Losses were seen in China, Brazil and Russia.
Business optimism fell to a six-month low in June.
Confidence remained positive in developed and emerging nations, but eased (on average) in both. Germany, the UK, Brazil, Russia and Australia were the only nations to report improved sentiment.
Price pressures gathered pace in June, with rates of inflation in output charges and input costs both accelerating. Increases in both measures were steeper in developed nations compared to emerging markets.”
J.P.Morgan and IHS Markit in association with ISM and IFPSM, “JP Morgan Global Composite PMI. Jun 2018“, 5 Jul 2018 More
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