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In Portfolioticker today
- Today at the stock market
- The portfolio today
- Energy: Oil and Gas Futures
- AU: Construction Work Done. Mar 2018
- EU: Flash Eurozone Composite PMI. May 2018
- US: New Residential Sales. Apr 2018
- US: Flash US Composite PMI. May 2018
- US: FOMC Minutes of Meeting 1-2 May 2018
- Japan Update
- China Update
Today at the stock market
“U.S. stocks ended with small gains on Wednesday after minutes from the Federal Reserve’s latest meeting suggested higher inflation may not result in faster interest rate hikes.
Monetary Policy: FOMC Minutes
Most Fed policymakers thought it likely another rate increase would be warranted “soon” if the U.S. economic outlook remains intact, and many participants saw little evidence of general overheating of the labor market, minutes of the FOMC’s last policy meeting showed.
Stocks turned higher after the news, with rate-sensitive S&P 500 utilities and real estate ending the day with the biggest percentage gains. Financials, which benefit from a rising rate environment, ended the day down 0.6%.
“The market is probably breathing a little bit of a sigh of relief knowing that inflation even a bit above 2 percent may not necessarily mean a faster rate of increases,” said Mike Baele, managing director at U.S. Bank Private Client Wealth Management in Portland, Oregon.
The Federal Reserve has lifted borrowing costs once so far this year, in Mar 2018, and policymakers are currently about evenly split between those who expect two more rate rises this year and those who anticipate three. Investors overwhelmingly expect a rate rise at the next meeting on 12-13 Jun 2018.
Earlier in the day, comments by U.S. President Donald Trump that fueled further skepticism over trade talks between the United States and China weighed on the market. Trump had signaled a new direction for the trade talks, saying the current track appeared “too hard to get done,” a day after telling reporters that he was not pleased with the recent talks.
Retail, Consumer Discretionary
Retailers were mixed, with Target falling 5.7% after the retailer’s quarterly profit rose less than expected as price cuts, higher wages and investments into its online business dented margins.
Tiffany rose 23.3% after the jeweler’s quarterly results blew past estimates and the company raised its full-year profit forecast and announced a $1 billion buyback program.
Ralph Lauren rose 14.3% after the company’s higher margins helped deliver a solid profit that beat analysts’ estimates.
Lowe’s rose 10.4% after the home improvement retailer maintained its annual financial targets and billionaire investor Bill Ackman said his hedge fund had taken a roughly $1 billion stake in the company.” 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)||2,733.29||+0.32%||2,238.83||+2.23%|
^ USD and AUD denominated indices over the past 52 weeks Chart: Bunting
|Index||Currency||Today||Change||31 Dec 17||YTD|
Portfolio stock prices
Visa closed on a record high of $131.88, just 6 cents above its 11 May 2018 record of $131.82.
|Stock||Ticker||Today||Change||31 Dec 17||YTD|
Selected Tech News Headlines
- Trump cannot block Twitter users for their political views, court rules: “President Trump’s decision to block his Twitter followers for their political views is a violation of the First Amendment, a federal judge ruled Wednesday, saying that Trump’s effort to silence his critics is not permissible under the U.S. Constitution because the digital space in which he engages with constituents is a public forum.[Knight First Amendment Institute v. Trump, 17-cv-5205, U.S. District Court, Southern District of New York (Memorandum and Order: 75 pages)] The ruling rejects administration arguments that the First Amendment does not apply to Trump in this case because he was acting as a private individual. Judge Naomi Buchwald said Trump, as a federal official, is not exempt from constitutional obligations to guard against “viewpoint discrimination.” The decision marks a victory for free-speech activists representing seven Twitter users who alleged that their rights had been infringed after they tweeted at Trump critiquing his policies. Trump blocked them on Twitter, preventing them from seeing his tweets or interacting with them.” [Defendants: Donald J Trump and Daniel Scavino - others dismissed] Washington Post Business Insider Reuters AP
^ Bloomberg Dollar Spot Index (DXY) movements today (mouseover for 12 month view) Chart: Bloomberg
“The Bloomberg Dollar Spot Index (DXY) rose 0.1%.
The EUR fell 0.6% to USD 1.1704, the weakest in more than 6 months.
Britain’s GBP fell 0.6% to USD 1.3356, the weakest since Dec 2017.
Japan’s JPY rose 0.7%, the most since Feb 2018, to 110.13 per USD.
The yield on 10-year Treasuries fell 6 basis points to 3.0045%.
Germany’s 10-year yield fell 5 basis points to 0.507%.
Britain’s 10-year yield fell 8 basis points, the most in 2 months, to 1.439%.” 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): $71.71/barrel -0.68% Chart
- ICE (London) Brent North Sea Crude: $79.65/barrel +0.10% Chart
- NYMEX Natural gas futures: $2.92/MMBTU +0.48% Chart
Ever Wonder: Who Are “the Rich” Anyway?
Short Answer: Entitlement to the tag “rich” starts at USD 25 million (AUD 33 million) of investable wealth. Bloomberg
AU: Construction Work Done. Mar 2018
Press Release Extract [au_const]
“Value of Work Done, Chain Volume Measures
- The trend estimate for total construction work done rose 1.4% in the March quarter 2018.
- The seasonally adjusted estimate for total construction work done rose 0.2% to $51,211.5m in the March quarter.
Building work done
- The trend estimate for total building work done rose 0.2% in the March quarter.
- The trend estimate for non-residential building work rose 1.0% and residential building work fell 0.4%.
- The seasonally adjusted estimate of total building work done fell 0.7% to $28,203.1m in the March quarter.
Engineering work done
- The trend estimate for engineering work done rose 2.8% in the March quarter.
- The seasonally adjusted estimate for engineering work done rose 1.5% to $23,008.4m in the March quarter.“
Australian Bureau of Statistics, “8755.0 Construction Work Done. Mar 2018“, 23 May 2018 (11:30 AEST) More
EU: Flash Eurozone Composite PMI. May 2018
Press Release Extract [eu_pmi]
- Flash Eurozone PMI Composite Output Index at 54.1 (55.1 in April). 18-month low.
- Flash Eurozone Services PMI Activity Index at 53.9 (54.7 in April). 16-month low.
- Flash Eurozone Manufacturing PMI Output Index at 54.5 (56.2 in April). 18-month low.
- Flash Eurozone Manufacturing PMI at 55.5 (56.2 in April). 15-month low.
Flash PMI survey data showed business activity and new order growth slowing in May, with hiring and backlogs of work likewise exhibiting slower rates of increase. The survey also indicated that companies have become less optimistic about the outlook. There was mixed news on price trends, as cost pressures increased but selling price inflation slowed.
The IHS Markit Eurozone PMI fell from 55.1 in April to 54.1 in May, according to the flash reading which is based on approximately 85% of usual replies. By remaining well above the 50 no-change mark, the PMI continued to signal robust growth of business activity in the euro area. However, the latest increase was the weakest for one-and-a-half years, the rate of expansion having cooled for a fourth successive month.
Growth deteriorated in both manufacturing and services, down to 18- and 16-month lows respectively.
Inflows of new business likewise grew at a reduced pace, the rate of increase waning for a fifth successive month to reach the lowest since October 2016. Nineteen-month lows were seen in terms of both manufacturing and service sector new business growth.
Reduced new order inflows in the goods-producing sector were linked in part to weaker export growth, which registered the smallest rise since August 2016.
While the surveys from February through to April had seen widespread cases of business activity being disturbed by temporary factors such as bad weather, strikes, illness and the timing of Easter, the May survey saw frequent reports of business being disrupted by a higher than usual number of public holidays, which workers often bridged on to weekends.
The surveys nonetheless continued to provide anecdotal evidence of business being constrained by shortages of both raw materials and labour in some countries. Such constraints were also indicated by a further marked lengthening of supplier delivery times and rising backlogs of work. However, the extent of such constraints showed further signs of easing.
Although supplier delivery delays remained widespread, and close to the highest seen in the history of the survey, the incidence of such delays has fallen to the lowest since last September. Similarly, backlogs of work continued to grow but at the weakest rate since January 2017, easing in both manufacturing and services.
Pressure on capacity was alleviated to some extent by a further robust increase in employment, albeit with the rate of job creation slipping to the lowest for nine months. Job gains moderated in manufacturing and services alike.
Recruitment was hit in some cases by increased uncertainty about business prospects. Future expectations about business activity levels in a year’s time dropped to an 18-month low. Confidence about the outlook waned in both manufacturing and services. However, the overall level of optimism remained above the long-run average, and in some cases the less positive outlook simply reflected the fact that the past year had been especially strong.
The May survey also brought mixed news on prices. Input cost inflation accelerated to a three- month high, buoyed in part by higher fuel and energy costs, alongside signs of rising wage pressures in some countries.
In contrast, average selling prices for goods and services rose at the slowest rate since last September, with companies often reporting difficulties in hiking prices amid weak final demand.
By country, growth slowed markedly in both France and Germany, but accelerated to a three-month high across the rest of the region as a whole. France’s expansion was the weakest for 16 months. Although factory output growth improved to the fastest for three months, the French service sector reported the smallest rise in activity since January 2017. In Germany, business activity showed the smallest rise for 20 months, with rates of increase deteriorating in both manufacturing and services. Factory output growth was the weakest for 18 months while the service sector expanded to the least extent for 20 months.
Commenting on the flash PMI data, Chris Williamson, Chief Business Economist at IHS Markit said:
‘The May PMI brought yet another set of disappointing survey results, though once again a note of caution is required when interpreting the findings. While prior months have seen various factors such as extreme weather, strikes, illness and the timing of Easter dampen growth, May saw reports of business being adversely affected by an unusually high number of public holidays.
‘Furthermore, despite the headline PMI dropping to an 18-month low, the survey remains at a level consistent with the eurozone economy growing at a reasonably solid rate of just over 0.4% in the second quarter.
‘Job creation is also continuing to run at an encouragingly robust rate and optimism about the business outlook remains above its long-run average.
‘However, it’s also becoming increasingly evident that underlying growth momentum has slowed compared to late last year, especially in relation to exports. Hiring has consequently shown signs of being reined-in. More expensive oil and rising wages are meanwhile continuing to push companies’ costs higher, but weak final demand means firms are struggling to pass these higher costs onto customers.
‘Some of the fog will hopefully lift with the June PMI data, providing a clearer signal of the underlying growth momentum. Until then, however, it’s likely that the disappointing May survey results will rekindle some concerns regarding downside risks facing the euro area economy.’”
IHS Markit, “Flash Eurozone Composite PMI. May 2018“, 23 May 2018 More
US: New Residential Sales. Apr 2018
Press Release Extract [us_newres]
New Home Sales
Sales of new single-family houses in April 2018 were at a seasonally adjusted annual rate of 662,000. This is 1.5 percent (±11.8 percent) below the revised March rate of 672,000, but is 11.6 percent (±23.7 percent) above the April 2017 estimate of 593,000.
The median sales price of new houses sold in April 2018 was $312,400. The average sales price was $407,300.
For Sale Inventory and Months’ Supply
The seasonally-adjusted estimate of new houses for sale at the end of April was 300,000. This represents a supply of 5.4 months at the current sales rate. ”
U.S. Census Bureau and the Department of Housing and Urban Development, “New Residential Sales. Apr 2018“, 23 May 2018 (10:00) More
US: Flash US Composite PMI. May 2018
Press Release Extract [us_pmi]
- Flash U.S. Composite Output Index at 55.7 (54.9 in April). 3-month high.
- Flash U.S. Services Business Activity Index at 55.7 (54.6 in April). 3-month high.
- Flash U.S. Manufacturing PMI at 56.6 (56.5 in April). 44-month high.
- Flash U.S. Manufacturing Output Index at 55.8 (56.6 in April). 2-month low.
U.S. private sector firms signalled a robust and accelerated rise in business activity during May, which adds to evidence of a sustained growth rebound in the second quarter of 2018.
IHS Markit U.S. Composite PMI™
At 55.7 in May, up from 54.9 in April, the seasonally adjusted IHS Markit Flash U.S. Composite PMI Output Index was the highest for three months and well above the crucial 50.0 no-change value. A faster rise in service sector output was the key factor behind the acceleration in overall business activity. Manufacturing production increased markedly, but at a slightly softer pace than in April.
Another strong upturn in new business volumes helped to boost output growth in May. Survey respondents commented on resilient domestic demand and a supportive economic backdrop. Higher workloads contributed to the sharpest rise in unfinished business since March 2015.
A solid rate of employment growth was maintained across the private sector in May, which was linked to long-term business expansion plans and upbeat projections of client demand in the coming months. The index measuring business expectations for the year ahead held close to the 35-month peak seen in April.
May data revealed a sharp and accelerated rise in operating expenses across the private sector economy. The latest increase in average input prices was the fastest since July 2013. Anecdotal evidence mainly cited higher prices for metals (especially steel) and increased oil-related costs during the latest survey period.
The composite index is based on original survey data from the IHS Markit U.S. Services PMI and the IHS Markit U.S. Manufacturing PMI.
IHS Markit U.S. Services PMI™
Service sector business activity growth continued to accelerate in May. At 55.7, up from 54.6 in April, the seasonally adjusted IHS Markit Flash U.S. Services PMITM Business Activity Index pointed to the fastest rate of expansion for three months.
May data signalled a slight slowdown in new business growth from the three-year peak recorded in April. However, the latest rise in new work was faster than seen on average since the survey began in late-2009.
Meanwhile, backlogs of work were accumulated for the thirteenth month running in May, with the latest increase the strongest since March 2015. Survey respondents noted that rising client demand had resulted in pressures on operating capacity and a corresponding need to hire additional staff.
Service providers signalled a robust and accelerated increase in their average cost burdens in May. The rate of input price inflation was the steepest for three months, which firms linked to higher oil-related costs and rising commodity prices.
IHS Markit U.S. Manufacturing PMI™
The seasonally adjusted IHS Markit Flash U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) registered 56.6 in May, up fractionally from 56.5 in April, to signal the strongest improvement in business conditions since September 2014.
May data revealed relatively strong rises in both manufacturing production and incoming new business, which survey respondents attributed to improving economic conditions and a continued recovery in domestic sales.
There were signs that manufacturers intend to boost production schedules in the coming months. Backlogs of work were accumulated at the strongest pace since September 2015 and payroll numbers increased to a greater extent than in the previous month. Moreover, business optimism regarding the year ahead outlook was the highest since February 2015.
In anticipation of greater workloads, manufacturers signalled a robust increase in input buying during May. Pre-production inventories also picked up, with the degree of stock accumulation the largest since the start of 2018.
Meanwhile, latest data signalled intense pressure on supply chains, with average lead-times lengthening to the greatest extent since the survey began in May 2007. Manufacturers widely commented on stretched supplier capacity and logistics delays during the latest survey period. Robust demand for raw materials and rising commodity prices resulted in another steep increase in input costs across the manufacturing sector. The overall rate of input price inflation eased slightly since April, but was still among the fastest seen over the past seven years. Moreover, prices charged by manufacturing companies continued to rise at the strongest rate since June 2011.
Commenting on the flash PMI data, Chris Williamson, Chief Business Economist at IHS Markit said:
“The flash May PMI surveys point to an encouragingly solid pace of economic growth of 2.5- 3% with monthly job gains running at just over 200,000, though the interesting action is coming on the prices front.
“Input costs measured across both manufacturing and services are rising at the fastest rate for nearly five years, with the goods-producing sector seeing the steepest cost increases for seven years in recent months.
“Furthermore, supplier delivery delays, a key forward-indicator of inflationary pressures, have risen to the highest seen in the 11 year survey history. Rising demand has stretched supply chains to the extent that suppliers are increasingly able to demand higher prices. At the same time, higher oil and energy prices are pushing up firms’ costs.
“Business optimism meanwhile remains at a three- year high, with companies commonly expecting rising demand to help drive business growth, setting the scene for further strong survey results in coming months.””
IHS Markit, “Flash US Composite PMI. May 2018“, 23 May 2018 (09:45) More
US: FOMC Minutes of Meeting 1-2 May 2018
“Developments in Financial Markets and Open Market Operations
The manager of the System Open Market Account (SOMA) provided a summary of domestic and global financial developments over the intermeeting period. Broad measures of financial conditions had tightened somewhat in recent weeks, with U.S. equity prices lower, the foreign exchange value of the dollar moderately higher, and longer-term Treasury yields up a little. Market participants pointed to a range of factors contributing to the decline in stock prices, including concerns about the outlook for trade policy both in the United States and abroad, the potential for increased regulatory oversight of U.S. technology companies, and incoming data suggesting some moderation in global economic growth. The rise in nominal U.S. Treasury yields was associated with an increase in inflation compensation that, in turn, seemed to reflect a firming in inflation data as well as a notable rise in crude oil prices. Judging from federal funds futures quotes, the expected path of the federal funds rate changed relatively little over the intermeeting period. While term LIBOR (London interbank offered rates) had widened relative to comparable-maturity OIS (overnight index swap) rates in recent months, the cost of dollar funding through the foreign exchange swap market had not risen to the same degree. Recent usage of standing U.S. dollar liquidity swap lines had been low, consistent with a view that the recent widening in LIBOR-OIS spreads did not reflect increased funding pressures or rising concerns about the condition of financial institutions.
The manager discussed the role of standing liquidity swap lines in supporting financial stability and recommended that these swap lines be renewed at this meeting following the usual annual schedule. The manager also discussed current projections for principal payments received from mortgage-backed securities (MBS) held in the SOMA. These projections suggested that, under the Committee’s plan for balance sheet normalization, reinvestments of MBS principal would likely cease later this year, although the timing is uncertain.
The deputy manager followed with a briefing focused on recent developments in the federal funds market, noting that the effective federal funds rate had increased in recent weeks and had moved toward the top of the target range for the federal funds rate. In large part, this development seemed to reflect a firming in rates on repurchase agreements (repos) that, in turn, had resulted from an increase in Treasury bill issuance and the associated higher demands for repo financing by dealers and others. Higher rates had reportedly made repos a more attractive alternative investment for major lenders in the federal funds market, thus reducing the availability of funding in that market and putting some upward pressure on the federal funds rate. While some of the recent pressure on the federal funds rate could be expected to fade over coming weeks as the market adjusts to higher levels of Treasury bills, the gradual normalization of the Federal Reserve’s balance sheet and the accompanying decline in reserves was anticipated to continue putting some upward pressure on the federal funds rate relative to the interest on excess reserves (IOER) rate.
The deputy manager then discussed the possibility of a small technical realignment of the IOER rate relative to the top of the target range for the federal funds rate. Since the target range was established in December 2008, the IOER rate has been set at the top of the target range to help keep the effective federal funds rate within the range. Lately the spread of the IOER rate over the effective federal funds rate had narrowed to only 5 basis points. A technical adjustment of the IOER rate to a level 5 basis points below the top of the target range could keep the effective federal funds rate well within the target range. This could be accomplished by implementing a 20 basis point increase in the IOER rate at a time when the Committee raised the target range for the federal funds rate by 25 basis points. Alternatively, the IOER rate could be lowered 5 basis points at a meeting in which the Committee left the target range for the federal funds rate unchanged.
In their discussion of this issue, participants generally agreed that it could become appropriate to make a small technical adjustment in the Federal Reserve’s approach to implementing monetary policy by setting the IOER rate modestly below the top of the target range for the federal funds rate. Such an adjustment would be consistent with the Committee’s statement in the Policy Normalization Principles and Plans that it would be prepared to adjust the details of the approach to policy implementation during the period of normalization in light of economic and financial developments. Many participants judged that it would be useful to make such a technical adjustment sooner rather than later. Participants generally agreed that it would be desirable to make that adjustment at a time when the FOMC decided to increase the target range for the federal funds rate; that timing would simplify FOMC communications and emphasize that the IOER rate is a helpful tool for implementing the FOMC’s policy decisions but does not, in itself, convey the stance of policy. While additional technical adjustments in the IOER rate could become necessary over time, these were not expected to be frequent. A number of participants also 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 in recent years.
The Committee voted unanimously to renew the reciprocal currency arrangements with the Bank of Canada and the Bank of Mexico; these arrangements are associated with the Federal Reserve’s participation in the North American Framework Agreement of 1994. In addition, the Committee voted unanimously to renew the dollar and foreign currency liquidity swap arrangements with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank. The votes to renew the Federal Reserve’s participation in these standing arrangements are taken annually at the April or May FOMC meeting.
By unanimous vote, the Committee ratified the Open Market Desk’s domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System’s account during the intermeeting period.
Staff Review of the Economic Situation
The information reviewed for the May 1-2 meeting indicated that labor market conditions continued to strengthen in the first quarter, while real gross domestic product (GDP) rose at a moderate pace. Consumer price inflation, as measured by the 12‑month percentage change in the price index for personal consumption expenditures (PCE), was 2 percent in March. Survey-based measures of longer-run inflation expectations were, on balance, little changed.
Total nonfarm payroll employment rose less in March than in the previous two months, but the increase for the first quarter as a whole was solid. The labor force participation rate edged down in March but moved up a little, on net, in the first quarter. The national unemployment rate remained at 4.1 percent for a sixth consecutive month. Similarly, the unemployment rates for African Americans, Asians, and Hispanics were roughly flat, on balance, in recent months. The share of workers employed part time for economic reasons was little changed at a rate close to that prevailing before the previous recession. The rate of private-sector job openings stayed at an elevated level in February, the rate of quits remained high, and initial claims for unemployment insurance benefits continued to be low through mid-April. Recent readings showed that increases in labor compensation stepped up modestly over the past year. The employment cost index for private workers rose 2.8 percent over the 12 months ending in March, and average hourly earnings for all employees increased 2.7 percent over that period. Both increases were larger than those reported for the 12 months ending in March 2017.
Total industrial production increased in March and rose at a solid pace for the first quarter as a whole, with gains in the output of manufacturers, mines, and utilities. Automakers’ schedules suggested that assemblies of light motor vehicles would edge down in the second quarter from the average pace in the first quarter, but broader indicators of manufacturing production, such as the new orders indexes from national and regional manufacturing surveys, continued to point to further gains in factory output in the near term.
Consumer expenditures rose at a modest pace in the first quarter following a strong gain in the preceding quarter. Monthly data pointed to some improvement toward the end of the quarter, as real PCE moved up in March after declining in January and February. However, the recent movements might have partly reflected the effects of a delay in many federal tax refunds, which could have shifted some consumer spending from February to March. Light motor vehicle sales stepped down in the first quarter after a strong fourth-quarter pace that was partly boosted by replacement sales following the fall hurricanes; sales declined in April, but indicators of vehicle demand remained upbeat. More broadly, key factors that influence consumer spending–including gains in employment and real disposable personal income, along with households’ elevated net worth–should continue to support solid real PCE growth in the near term. In addition, the lower tax withholding resulting from the tax cuts enacted late last year was likely to provide some impetus to spending in coming months. Consumer sentiment, as measured by the University of Michigan Surveys of Consumers, remained elevated in April.
Real residential investment was unchanged in the first quarter after a strong increase in the fourth quarter. Starts for new single-family homes decreased in March, but the average pace in the first quarter was little changed from the fourth quarter. In contrast, starts of multifamily units moved up in March after contracting in February, and they were higher in the first quarter than in the fourth. Sales of both new and existing homes increased in February and March.
Real private expenditures for business equipment and intellectual property increased at a moderate pace in the first quarter after rising briskly in the second half of last year. Nominal shipments of nondefense capital goods excluding aircraft edged down in March. However, 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 rose at a robust pace in the first 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–continued to move up through mid-April.
Total real government purchases rose at a slower rate in the first quarter than in the fourth quarter. Real federal purchases increased in the first quarter, with gains in both defense and nondefense spending. Real purchases by state and local governments also moved higher; state and local government payrolls were unchanged in the first quarter, but nominal construction spending by these governments rose somewhat.
The nominal U.S. international trade deficit widened in February as imports rose briskly, outpacing the increase in exports. Preliminary data on trade in goods suggested that the trade deficit narrowed sharply in March, with exports continuing to grow robustly but imports retracing earlier gains. The Bureau of Economic Analysis estimated that the change in real net exports added slightly to growth of real GDP in the first quarter.
Total U.S. consumer prices, as measured by the PCE price index, increased 2 percent over the 12 months ending in March. Core PCE price inflation, which excludes changes in consumer food and energy prices, was 1.9 percent over that same period. The consumer price index (CPI) rose 2.4 percent over the 12 months ending in March, while core CPI inflation was 2.1 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 emerging market economies (EMEs), including Mexico, China, and some other parts of emerging Asia. However, incoming data in a number of advanced foreign economies (AFEs)–in particular, real GDP in the United Kingdom–showed somewhat slower growth than market participants were expecting, partly because of transitory factors such as severe weather. Overall, inflation in most AFEs and EMEs continued to be subdued, increasing in the AFEs in the first quarter on higher energy prices but stepping down some in the EMEs, partly reflecting lower food prices in some Asian economies.
Staff Review of the Financial Situation
Early in the intermeeting period, uncertainty over trade policy and negative news about the technology sector reportedly contributed to lower prices for risky assets, but these concerns subsequently seemed to recede amid stronger-than-expected corporate earnings reports. Equity prices declined, nominal Treasury yields increased modestly, and market-based measures of inflation compensation ticked up on net. Meanwhile, financing conditions for nonfinancial businesses and households largely remained supportive of spending.
FOMC communications over the intermeeting period were generally viewed by market participants as reflecting an upbeat outlook for economic growth and as consistent with a continued gradual removal of monetary policy accommodation. The FOMC’s decision to raise the target range for the federal funds rate 25 basis points at the March meeting was widely anticipated. Market reaction to the release of the March FOMC minutes later in the intermeeting period was minimal. The probability of an increase in the target range for the federal funds rate occurring at the May FOMC meeting, as implied by quotes on federal funds futures contracts, remained close to zero; the probability of an increase at the June FOMC meeting rose to about 90 percent by the end of the intermeeting period. Expected levels of the federal funds rate at the end of 2019 and 2020 implied by OIS rates rose modestly.
The nominal Treasury yield curve continued to flatten over the intermeeting period, with yields on 2-year and 10-year Treasury securities up 17 basis points and 7 basis points, respectively. Measures of inflation compensation derived from Treasury Inflation-Protected Securities increased 4 basis points and 7 basis points at the 5- and 5-to-10-year horizons, respectively, against a backdrop of rising oil prices. Option-implied measures of volatility of longer-term interest rates continued to decline over the intermeeting period after their marked increase earlier this year.
The S&P 500 index decreased over the period on net. Equity prices declined early in the intermeeting period, reportedly in response to trade tensions between the United States and China as well as negative news about the technology sector. However, equity prices subsequently retraced some of the earlier declines as concerns about trade policy seemed to ease and corporate earnings reports for the first quarter of 2018 generally came in stronger than expected. Option-implied volatility on the S&P 500 index at the one-month horizon–the VIX–declined but remained at elevated levels relative to 2017, ending the period at approximately 15 percent. On net, spreads of yields of investment-grade corporate bonds over comparable‑maturity Treasury securities widened a bit, while spreads for speculative‑grade corporate bonds were unchanged.
Conditions in short-term funding markets remained generally stable over the intermeeting period. Spreads on term money market instruments relative to comparable-maturity OIS rates were still larger than usual in some segments of the money market. Reflecting the FOMC’s policy action in March, yields on a broad set of money market instruments moved about 25 basis points higher. Bill yields also stayed high relative to OIS rates as cumulative Treasury bill supply remained elevated. Money market dynamics over quarter-end were muted relative to previous quarter-ends.
Foreign equity markets were mixed over the intermeeting period, with investors attuned to developments related to U.S. and Chinese trade policies and to news about the U.S. technology sector. Broad Japanese and European equity indexes outperformed their U.S. counterparts, ending the period somewhat higher. Market-based measures of policy expectations and longer‑term yields were little changed in the euro area and Japan but declined modestly in the United Kingdom on weaker-than-expected economic data. Longer-term yields in Canada moved up moderately amid notably higher oil prices. In EMEs, sovereign bond spreads edged up; capital continued to flow into EME mutual funds, although at a slower pace lately.
On net, the broad nominal dollar index appreciated moderately over the intermeeting period. In the early part of the period, the index depreciated slightly, as relatively positive news about the current round of NAFTA (North American Free Trade Agreement) negotiations led to appreciation of the Mexican peso and Canadian dollar, two currencies with large weights in the index. Later in the period, there was a broad‑based appreciation of the dollar against most currencies as U.S. yields increased relative to those in AFEs and as the Mexican peso declined amid uncertainty associated with the upcoming presidential elections.
Growth in banks’ commercial and industrial (C&I) loans strengthened in March and the first half of April following relatively weak growth in January and February. Respondents to the April Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) reported that their institutions had eased standards and terms on C&I loans in the first quarter, most often citing increased competition from other lenders as the reason for doing so. Gross issuance of corporate bonds and leveraged loans was strong in March, and equity issuance was robust. The credit quality of nonfinancial corporations was stable over the intermeeting period, and the ratio of aggregate debt to assets remained near multidecade highs.
Commercial real estate (CRE) financing conditions remained accommodative over the intermeeting period. CRE loan growth at banks strengthened in March but edged down in the first half of April. Spreads on commercial mortgage-backed securities (CMBS) were little changed over the intermeeting period and remained near their post-crisis lows. CMBS issuance continued to be strong in March but slowed somewhat in April. Respondents to the April SLOOS reported easing standards on nonfarm nonresidential loans and tightening standards on multifamily loans, whereas standards on construction and land development loans were little changed in the first quarter. Meanwhile, respondents indicated weaker demand for loans across these three CRE loan categories.
Financing conditions in the residential mortgage market remained accommodative for most borrowers in March and April. For borrowers with low credit scores, conditions continued to ease, but credit remained relatively tight and the volume of mortgage loans extended to this group remained low. Banks responding to the April SLOOS reported weaker loan demand across most residential real estate (RRE) loan categories, while standards were reportedly about unchanged for most RRE loan types in the first quarter.
Consumer credit growth moderated in March and the first half of April. Respondents to the April SLOOS reported that standards and terms on auto and credit card loans tightened, and that demand for these loans weakened in the first quarter. On balance, credit remained readily available to prime-rated borrowers, but tight for subprime borrowers, over the intermeeting period.
The staff provided its latest report on potential risks to financial stability; the report again characterized the financial vulnerabilities of the U.S. financial system as moderate on balance. This overall assessment incorporated the staff’s judgment that vulnerabilities associated with asset valuation pressures, while having come down a little in recent months, nonetheless continued to be elevated. The staff judged vulnerabilities from financial-sector leverage and maturity and liquidity transformation to be low, vulnerabilities from household leverage as being in the low-to-moderate range, and vulnerabilities from leverage in the nonfinancial business sector as elevated. The staff also characterized overall vulnerabilities to foreign financial stability as moderate while highlighting specific issues in some foreign economies, including–depending on the country–elevated asset valuation pressures, high private or sovereign debt burdens, and political uncertainties.
Staff Economic Outlook
The staff projection for U.S. economic activity prepared for the May FOMC meeting continued to suggest that the economy was expanding at an above-trend pace. Real GDP growth, which slowed in the first quarter, was expected to pick up in the second quarter and to outpace potential output growth through 2020. The unemployment rate was projected to decline further over the next few years and to continue to run below the staff’s estimate of its longer-run natural rate over this period. Relative to the forecast prepared for the March meeting, the projection for real GDP growth in 2018 was revised down a little, primarily in response to incoming consumer spending data that were somewhat softer than the staff had expected. Beyond 2018, the projection for GDP growth was essentially unrevised. 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 also a touch smaller than in the previous forecast.
The near-term projection for consumer price inflation was revised up slightly in response to incoming data on prices. Beyond the near term, the forecast for inflation was a bit lower than in the previous projection, reflecting the slightly higher unemployment rate in the new forecast. The rates of both total and core PCE price inflation were projected to be faster in 2018 than in 2017. The staff projected that total PCE inflation would be near the Committee’s 2 percent objective over the next several years. Total PCE inflation was expected to run slightly below core inflation in 2019 and 2020 because of a projected decline in energy prices.
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 the economy was already operating above its potential level and resource utilization continued to tighten, as the staff projected. Risks to the inflation projection also were seen as balanced. An upside risk was that inflation could increase more than expected in an economy that was projected to move further above its potential. Downside risks included the possibilities that longer-term inflation expectations may be lower than was assumed or that the run of low core inflation readings last year could prove to be more persistent than the staff expected.
Participants’ Views on Current Conditions and the Economic Outlook
In their discussion of the economic situation and the outlook, meeting participants agreed that information received since the FOMC met in March indicated that the labor market had continued to strengthen and that economic activity had been rising at a moderate rate. Job gains had been strong, on average, in recent months, and the unemployment rate had stayed low. Recent data suggested that growth of household spending had moderated from its strong fourth‑quarter pace, 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. Market-based measures of inflation compensation remained low; survey-based measures 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. Real GDP growth slowed somewhat less in the first quarter than anticipated at the time of the March meeting, and participants expected that the moderation in the growth of consumer spending early in the year would prove temporary. They noted a number of economic fundamentals were currently supporting continued above-trend economic growth; these included a strong labor market, federal tax and spending policies, high levels of household and business confidence, favorable financial conditions, and strong economic growth abroad. Participants generally expected that further gradual increases in the target range for the federal funds rate would be consistent with solid 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 to be roughly balanced.
Participants generally reported that their business contacts were optimistic about the economic outlook. However, in a number of Districts, contacts expressed concern about the possible adverse effects of tariffs and trade restrictions, including the potential for postponing or pulling back on capital spending. Labor markets were generally strong, and contacts in a number of Districts reported shortages of workers in specific industries or occupations. In some cases, labor shortages were contributing to upward pressure on wages. In many Districts, business contacts experienced rising costs of nonlabor inputs, particularly trucking, rail, and shipping rates and prices of steel, aluminum, lumber, and petroleum-based commodities. Reports on the ability of firms to pass through higher costs to customers varied across Districts. Activity in the energy sector remained strong, and crude oil production was expected to continue to expand in response to rising global demand. In contrast, in agricultural areas, low crop prices continued to weigh on farm income. It was noted that the potential for higher Chinese tariffs on key agricultural products could, in the longer run, hurt U.S. competitiveness.
Participants generally agreed that labor market conditions strengthened further during the first quarter of the year. Nonfarm payroll employment posted strong gains, averaging 200,000 per month. The unemployment rate was unchanged, but at a level below most estimates of its longer-run normal rate. Both the overall labor force participation rate and the employment-to-population ratio moved up. The first-quarter data from the employment cost index indicated that the strength in the labor market was showing through to a gradual pickup in wage increases, although the signal from other wage measures was less clear. Many participants commented that overall wage pressures were still moderate or were strong only in industries and occupations experiencing very tight labor supply; several of them noted that recent wage developments provided little evidence of general overheating in the labor market. With economic growth anticipated to remain above trend, participants generally expected the unemployment rate to remain below, or to decline further below, their estimates of its longer‑run normal rate. Several participants also saw scope for a strong labor market to continue to draw individuals into the workforce. However, a few others questioned whether tight labor markets would have a lasting positive effect on labor force participation.
The 12-month changes in overall and core PCE prices moved up in March, to 2 percent and 1.9 percent, respectively. Most participants viewed the recent firming in inflation as providing some reassurance that inflation was on a trajectory to achieve the Committee’s symmetric 2 percent objective on a sustained basis. In particular, the recent readings appeared to support the view that the downside surprises last year were largely transitory. Some participants noted that inflation was likely to modestly overshoot 2 percent for a time. However, several participants suggested that the underlying trend in inflation had changed little, noting that some of the recent increase in inflation may have represented transitory price changes in some categories of health care and financial services, or that various measures of underlying inflation, such as the 12-month trimmed mean PCE inflation rate from the Federal Reserve Bank of Dallas, remained relatively stable at levels below 2 percent. In discussing the outlook for inflation, many participants emphasized that, after an extended period of low inflation, the Committee’s longer-run policy objective was to return inflation to its symmetric 2 percent goal on a sustained basis. Many saw tight resource utilization, the pickup in wage increases and nonlabor input costs, and stable inflation expectations as supporting their projections that inflation would remain near 2 percent over the medium term. But a few cautioned that, although market-based measures of inflation compensation had moved up over recent months, in their view these measures, as well as some survey-based measures, remained at levels somewhat below those that would be consistent with an expectation of sustained 2 percent inflation as measured by the PCE price index.
Participants commented on a number of risks and uncertainties associated with their expectations for economic activity, the labor market, and inflation over the medium term. Some participants saw a risk that, as resource utilization continued to tighten, supply constraints could develop that would intensify upward wage and price pressures, or that financial imbalances could emerge, which could eventually erode the sustainability of the economic expansion. Alternatively, some participants thought that a strengthening labor market could bring a further increase in labor supply, allowing the unemployment rate to decline further with less upward pressure on wages and prices. Another area of uncertainty was the outlook for fiscal and trade policies. Several participants continued to note the challenge of assessing the timing and magnitude of the effects of recent fiscal policy changes on household and business spending and on labor supply over the next several years. In addition, they saw the trajectory of fiscal policy thereafter as difficult to forecast. With regard to trade policies, a number of participants viewed the range of possible outcomes for economic activity and inflation to be particularly wide, depending on what actions were taken by the United States and how U.S trading partners responded. And some participants observed that while these policies were being debated and negotiations continued, the uncertainty surrounding trade issues could damp business sentiment and spending. In their discussion of the outlook for inflation, a few participants also noted the risk that, if global oil prices remained high or moved higher, U.S. inflation would be boosted by the direct effects and pass-through of higher energy costs.
Financial conditions tightened somewhat over the intermeeting period but remained accommodative overall. The foreign exchange value of the dollar rose modestly, but this move retraced only a bit of the depreciation of the dollar since its 2016 peak. With their decline over the intermeeting period, equity prices were about unchanged, on net, since the beginning of the year but were still near their historical highs. Longer‑term Treasury yields rose, but somewhat less than shorter-term yields, and the yield curve flattened somewhat further.
In commenting on the staff’s assessment of financial stability, a couple of participants noted that after the bout of financial market volatility in early February, the use of investment strategies predicated on a low-volatility environment may have become less prevalent, and that some investors may have become more cautious. However, asset valuations across a range of markets and leverage in the nonfinancial corporate sector remained elevated relative to historical norms, leaving some borrowers vulnerable to unexpected negative shocks. With regard to the ability of the financial system to absorb such shocks, several participants commented that regulatory reforms since the crisis had contributed to appreciably stronger capital and liquidity positions in the financial sector. In this context, a few participants emphasized the need to build additional resilience in the financial sector at this point in the economic expansion.
In their consideration of monetary policy over the near term, participants discussed the implications of recent economic and financial developments for the outlook for economic growth, labor market conditions, and inflation and, in turn, for the appropriate path of the federal funds rate. All participants expressed the view that it would be appropriate for the Committee to leave the target range for the federal funds rate unchanged at the May meeting. Participants concurred that information received during the intermeeting period had not materially altered their assessment of the outlook for the economy. Participants commented that above-trend growth in real GDP in recent quarters, together with somewhat higher recent inflation readings, had increased their confidence that inflation on a 12-month basis would continue to run near the Committee’s longer-run 2 percent symmetric objective. That said, it was noted that it was premature to conclude that inflation would remain at levels around 2 percent, especially after several years in which inflation had persistently run below the Committee’s 2 percent objective. In light of subdued inflation over recent years, a few participants observed that adjustments in the stance of policy should take account of the possibility that longer-term inflation expectations have drifted a bit below levels consistent with the Committee’s 2 percent inflation objective. Most participants judged that if incoming information broadly confirmed their current economic outlook, it would likely soon be appropriate for the Committee to take another step in removing policy accommodation. Overall, participants agreed that the current stance of monetary policy remained accommodative, supporting strong labor market conditions and a return to 2 percent inflation on a sustained basis.
With regard to the medium-term outlook for monetary policy, all 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 generally agreed with the assessment that continuing to raise the target range for the federal funds rate gradually would likely be appropriate if the economy evolves about as expected. These participants commented that this gradual approach was most likely to be conducive to maintaining strong labor market conditions and achieving the symmetric 2 percent inflation objective on a sustained basis without resulting in conditions that would eventually require an abrupt policy tightening. A few participants commented that recent news on inflation, against a background of continued prospects for a solid pace of economic growth, supported the view that inflation on a 12-month basis would likely move slightly above the Committee’s 2 percent objective for a time. It was also noted that a temporary period of inflation modestly above 2 percent would be consistent with the Committee’s symmetric inflation objective and could be helpful in anchoring longer-run inflation expectations at a level consistent with that objective.
Meeting participants also discussed the recent flatter profile of the term structure of interest rates. Participants pointed to a number of factors contributing to the flattening of the yield curve, including the expected gradual rise of the federal funds rate, the downward pressure on term premiums from the Federal Reserve’s still-large balance sheet as well as asset purchase programs by other central banks, and a reduction in investors’ estimates of the longer-run neutral real interest rate. A few participants noted that such factors could make the slope of the yield curve a less reliable signal of future economic activity. However, several participants thought that it would be important to continue to monitor the slope of the yield curve, emphasizing the historical regularity that an inverted yield curve has indicated an increased risk of recession.
Participants commented on how the Committee’s communications in its postmeeting statement might need to be revised in coming meetings if the economy evolved broadly as expected. A few participants noted that if increases in the target range for the federal funds rate continued, the federal funds rate could be at or above their estimates of its longer-run normal level before too long. In addition, a few observed that the neutral level of the federal funds rate might currently be lower than their estimates of its longer-run level. In light of this, some participants noted it might soon be appropriate to revise the forward-guidance language in the statement indicating that the “federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run” or to modify the language stating that “the stance of monetary policy remains accommodative.” Participants expressed a range of views on the amount of further policy firming that would likely be required over the medium term to achieve the Committee’s goals. Participants indicated that the Committee, in making policy decisions over the next few years, should conduct policy with the aim of keeping inflation near its longer-run symmetric objective while sustaining the economic expansion and a strong labor market. Participants agreed that the actual path of the federal funds rate would depend on the economic outlook as informed by incoming information.
Committee Policy Action
In their discussion of monetary policy for the period ahead, members judged that information received since the Committee met in March indicated that the labor market had continued to strengthen and that economic activity had been rising at a moderate rate. Job gains had been strong, on average, in recent months, and the unemployment rate had stayed low. Recent data suggested that growth of household spending had moderated from its strong fourth-quarter pace, while business fixed investment 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. In particular, in March the 12-month percent increase in PCE prices was equal to the Committee’s longer-run objective of 2 percent, while the measure excluding food and energy prices was only slightly below 2 percent. Market-based measures of inflation compensation remained low, and survey-based measures of longer-term inflation expectations were little changed, on balance.
All members viewed the recent data as indicating that the outlook for the economy had changed little since the previous meeting. In addition, financial conditions, although somewhat tighter than at the time of the March FOMC meeting, had stayed accommodative overall, while fiscal policy was likely to provide sizable impetus to the economy over the next few years. Consequently, members expected that, with further gradual adjustments to the stance of monetary policy, economic activity would expand at a moderate pace in the medium term and labor market conditions would remain strong. Members agreed that inflation on a 12-month basis is expected to run near the Committee’s symmetric 2 percent objective over the medium term. Members judged that the risks to the economic outlook appeared to be roughly balanced.
After assessing current conditions and the outlook for economic activity, the labor market, and inflation, members agreed to maintain the target range for the federal funds rate at 1½ to 1¾ percent. They noted that the stance of monetary policy remained accommodative, thereby supporting some further strengthening in 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 on their assessments of realized and expected economic conditions relative to the Committee’s objectives of maximum employment and 2 percent inflation. 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. Members also agreed that they would carefully monitor actual and expected developments in inflation in relation to the Committee’s symmetric inflation goal. Members expected that economic conditions would evolve in a manner that would warrant further gradual increases in the federal funds rate. Members agreed that the federal funds rate was likely to remain, for some time, below levels that they expected to prevail in the longer run. However, they noted that the actual path of the federal funds rate would depend on the economic outlook as informed by incoming data.
At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the SOMA in accordance with the following domestic policy directive, to be released at 2:00 p.m.:
“Effective May 3, 2018, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1½ to 1¾ percent, including overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 1.50 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day.
The Committee directs the Desk to continue rolling over at auction the amount of principal payments from the Federal Reserve’s holdings of Treasury securities maturing during each calendar month that exceeds $18 billion, and to reinvest in agency mortgage-backed securities the amount of principal payments from the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities received during each calendar month that exceeds $12 billion. Small deviations from these amounts for operational reasons are acceptable.
The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve’s agency mortgage-backed securities transactions.”
US Federal Reserve, “Minutes of the Federal Open Market Committee, May 1-2, 2018” 23 May 2018 (14:00) More
Nikkei Flash Japan Manufacturing PMI. May 2018
Press Release Extract [jp_pmi]
- Flash Japan Manufacturing PMI® declines in May to 52.5, from 53.8 in April.
- New order growth softens to nine-month low.
- Input prices rise at the fastest pace since January 2014
Commenting on the Japanese Manufacturing PMI survey data, Joe Hayes, Economist at IHS Markit, which compiles the survey, said:
‘Despite the promising upturn in April data, May’s flash release erred on the side of disappointment as the headline figure signalled the weakest expansion in manufacturing growth in nine months. Employment growth eased, in line with a weaker accumulation of work backlogs due to softer demand pressures. That said, new export sales expanded faster amid the recent USD strength vs. JPY. However, there was further evidence that supply-side constraints may be impacting output potential, as material shortages contributed to the greatest lengthening of delivery times in seven years. Consequently, input prices soared at the fastest pace in 52 months.’”
IHS Markit, “Nikkei Flash Japan Manufacturing PMI. May 2018“, 23 May 2018 More
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