CFD Markets News and Forecasts — 26-04-2019

Analysts at Wells Fargo notes that some temporary factors lift overall GDP growth in Q1.

• U.S. real GDP grew at an annualized rate of 3.2% in Q1-2019 relative to the previous quarter (top chart). Not only was the headline rate of growth stronger than most analysts expected, but it also represents a pick-up in growth relative to the 2.2% rate of growth that the economy registered in the fourth quarter. That said, the underlying details were not quite as strong as the headline rate of growth suggests.
• For starters, there was a sizeable build of inventories ($128 billion at an annualized rate), which added 0.7 percentage points to topline GDP growth. Given the lackluster rate of domestic final spending, some of this inventory build likely was unintentional. Therefore, inventory accumulation should fall back in coming quarters, which will exert a headwind on the overall rate of GDP growth at that time. Second, net exports added 1.0 percentage point to the overall rate of growth, which is among the largest positive contributions this component has made in this cycle. Although exports grew at a modest rate of 3.7%, imports fell 3.7%. Given continued growth in domestic demand, real imports likely will rebound in coming quarters, which also will exert a drag on growth.
• As noted above, domestic demand continued to grow in the first quarter, albeit at a modest pace. Real personal consumption expenditures (PCE) rose only 1.2% in Q1, and fixed investment spending was up only 1.5%. Indeed, final sales to private domestic purchases - a measure of the underlying strength of the domestic economy - rose just 1.3%, which is the slowest rate of growth in this component in nearly six years. That said, final domestic spending should accelerate somewhat in coming quarters. Real PCE ended the first quarter on a strong note, which gives it momentum heading into Q2, and durable goods orders data for March, released yesterday, suggest that capital spending could be picking up. Although the economy may not have been as strong in the first quarter as the headline GDP growth rate suggests, the economy is not in danger of stalling anytime soon.
• In our view, today’s stronger-than-expected GDP print does not materially change the outlook for Fed policy, at least in the near term. That is, the FOMC likely will refrain from raising rates for the foreseeable future. First, the underlying details were not as strong as the headline rate of GDP growth suggests. Second, the core PCE deflator rose at an annualized rate of just 1.3% in the first quarter. Consequently, this measure of consumer prices was up just 1.7% on a year-over-year basis in the first quarter. With the Fed’s preferred measure of consumer price inflation remaining below its objective of 2%, it seems likely that the FOMC will be happy to remain on the sideline watching the incoming data.

The final reading for the April Reuters/Michigan index of consumer sentiment came in at 97.2 compared to a preliminary reading of 96.9 and the March final reading of 98.4.

Economists had forecast the index to be revised upwardly to 97.0.

According to the report, the index of the current economic conditions fell to 112.3 from March’s final reading of 113.3.

Meanwhile, the index of consumer expectations decreased to 87.4 from March’s final reading of 88.8.

The report notes that the index of consumer sentiment has moved sideways, recording only small monthly variations since Trump first entered office. The sentiment index has averaged 97.2 in the past 28 months, identical to the April 2019 reading. Moreover, the sentiment index has remained between 95.0 and 99.0 for 21 of the past 28 months. Variations within plus or minus 2.0 percentage points for the Sentiment Index meant that most of the monthly changes were statistically insignificant.

James Smith, developed markets economist at ING, notes that markets are pricing in at least one rate cut over the next year, but with the economy continuing to perform solidly, it is much more likely that the Federal Reserve keeps rates on hold for the foreseeable future.

• Despite the mountain of headwinds clouding the US outlook at the start of the year, the economy put in a decent performance in the first quarter. The quarterly pace of growth accelerated to 3.2% annualised, up from 2.2% in the fourth quarter of 2018. The overall growth mix was fairly broad-based, although a few key trends stand out.
• Firstly, consumer spending slowed to around half the pace of growth recorded in 4Q18. That may be partially related to the government shutdown, but equally the boost from last year’s tax cuts is beginning to fade. That said, there are good reasons to expect consumer spending to perform solidly over coming months. The jobs market is strong, and with skill shortages emerging in different parts of the economy, wage growth has been accelerating.
• Unsurprisingly, trade made a strong contribution to the overall growth number. At the end of last year, firms appeared to bring forward imports to the fourth quarter to get ahead of the anticipated increase in tariffs. While that deadline was later postponed by President Trump, there was still a corresponding fall in imports during the first quarter, helping to lift overall GDP growth by 0.6 percentage points.
• To the extent that these excess imports were simply stockpiled at the end of 2018, you might have expected inventories to correspondingly decline in the first quarter, as these stocks were unwound. In the end though, the inventory component – which is typically very volatile and can be affected several different factors – actually increased, inflating the growth number by 0.7ppts.
• The bottom line is that there are some growth-positive factors at play here that are unlikely to persist into the second quarter. Having said that though, we continue to expect a solid performance from the US economy this year, particularly if we get some more encouraging news from the US-China trade talks. While we don’t expect the Fed to hike rates again this year, we think it looks pretty unlikely that rate cuts are on the horizon at this stage.

U.S. stock-index futures rose slightly on Friday as investors assessed mixed batch of earnings and preliminary Q1 GDP data.

Global Stocks:

Kjetil Olsen, an analyst at Nordea Markets, thinks the U.S. Fed's policymakers will not change their patient stance next week, and its chair Powell will not even try to rock the boat at the press conference.

• We and the market will focus on new views on inflation and inflation expectations.
• The U.S. economy is according to the Fed “in a good place and operating close to both of the Federal Reserve's dual-mandate objectives of maximum employment and price stability”.
• Since the 19-20 March meeting, growth in the US economy in Q1 seems to have held up better than anticipated by the Fed, there are green shoots globally and risky asset has continued to gain.
• On the international front, uncertainties prevail, and it is still a question, whether green shoots continue to grow. If not, investor sentiment could turn again and tighten financial conditions. We, therefore, think it is too early for the Fed to conclude.
• Inflation is still muted and the latest reading for core CPI (at 2.0% y/y) was if anything on the downside of expectations. The majority of the FOMC seems to have been more focused than before and more willing than before to let inflation overshoot the target of 2%, raising the bar for further rate hikes.
• Overall, we think the Fed still feel they are at a good place and don’t think they will want to signal a different view on policy going forward. Market reactions should, therefore, be muted. As there are no new forecasts and the statement is short, focus will be on the press conference. We and the market will particularly look for any new views on inflation and inflation expectations and the discussion around overshooting.

(company / ticker / price / change ($/%) / volume)

FedEx (FDX) downgraded to Sell from Neutral at UBS; target lowered to $161

3M (MMM) downgraded to Neutral from Buy at BofA/Merrill

Starbucks (SBUX) downgraded to Market Perform from Outperform at Wells Fargo; target lowered to $80

Chevron (CVX) reported Q1 FY 2019 earnings of $1.39 per share (versus $1.90 in Q1 FY 2018), beating analysts’ consensus of $1.33.

The company’s quarterly revenues amounted to $35.200 bln (-6.8% y/y), missing analysts’ consensus estimate of $38.425 bln.

CVX traded at $117.90 (0.00%) in pre-market trading.

The Commerce Department released on Friday its "advance" estimate for the U.S. gross domestic product (GDP) for the first quarter of 2019, which revealed the U.S. economy grew more than expected in the reviewed period. 

According to the estimate, the U.S. real GDP increased at an annual rate of 3.2 percent q-o-q last quarter, after rising by 2.2 percent q-o-q in the fourth quarter of 2018. 

Economists had expected GDP to boost by 2.0 percent q-o-q. 

According to the report, the gain in real GDP in the first quarter reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, exports, state and local government spending, and nonresidential fixed investment. Imports, which are a subtraction in the calculation of GDP, fell. These contributions, however, were partly offset by a decline in residential investment.

At the same time, the acceleration in real GDP growth in the first quarter reflected an upturn in state and local government spending, accelerations in private inventory investment and in exports, and a smaller decrease in residential investment which were partly offset by decelerations in PCE and nonresidential fixed investment, and a downturn in federal government spending. 

Exxon Mobil (XOM) reported Q1 FY 2019 earnings of $0.55 per share (versus $1.09 in Q1 FY 2018), missing beating analysts’ consensus of $0.74.

The company’s quarterly revenues amounted to $63.625 bln (-6.7% y/y), missing analysts’ consensus estimate of $67.354 bln.

XOM fell to $80.40 (-2.22%) in pre-market trading.

Starbucks (SBUX) reported Q1 FY 2019 earnings of $0.60 per share (versus $0.53 in Q1 FY 2018), beating analysts’ consensus of $0.57.

The company’s quarterly revenues amounted to $6.306 bln (+4.5% y/y), generally in line with analysts’ consensus estimate of $6.326 bln.

The company also issued upside guidance for FY 2019, projecting EPS of $2.75-2.79 versus analysts’ consensus estimate of $2.73.

SBUX fell to $77.09 (-0.03%) in pre-market trading.

Intel (INTC) reported Q1 FY 2019 earnings of $0.89 per share (versus $0.87 in Q1 FY 2018), beating analysts’ consensus of $0.87.

The company’s quarterly revenues amounted to $16.100 bln (0.0% y/y), generally in line with analysts’ consensus estimate of $16.031 bln.

The company issued downside guidance for Q2, projecting EPS of $0.89 (versus analysts’ consensus estimate of $1.02) and revenues of approx. $15.6 bln (versus analysts’ consensus estimate of $16.88 bln).

The company issued downside guidance for FY 2019, projecting EPS of $4.35 (versus analysts’ consensus estimate of $4.50) and revenues of approx. $69.0 bln (versus analysts’ consensus estimate of $71.07 bln).

INTC fell to $53.30 (-7.48%) in pre-market trading.

Ford Motor (F) reported Q1 FY 2019 earnings of $0.44 per share (versus $0.43 in Q1 FY 2018), beating analysts’ consensus of $0.27.

The company’s quarterly revenues amounted to $40.342 bln (-3.9% y/y), beating analysts’ consensus estimate of $37.366 bln.

F rose to $10.17 (+8.19%) in pre-market trading.

Amazon (AMZN) reported Q1 FY 2019 earnings of $7.09 per share (versus $3.27 in Q1 FY 2018), beating analysts’ consensus of $4.66.

The company’s quarterly revenues amounted to $59.700 bln (+17.0% y/y), generally in line with analysts’ consensus estimate of $59.731 bln.

The company also issued guidance for Q2, projecting revenues of $59.5-63.5 bln (versus analysts’ consensus estimate of $62.42 bln) and operating income of $2.6-3.6 bln (versus analysts’ consensus estimate of $4.2 bln).

AMZN rose to $1,914.30 (+0.63%) in pre-market trading.

• Speaking about talks with Labour party, says both sides will have to compromise in order to reach agreement
• Had "very constructive meeting" with Labour counterpart before leaving for Beijing
• Optimistic we will find common ground
• Hopes to see progress on Shanghai-London stock connect at June talks with China

• Talks with Labour party have been progressing
• Sides have discussed indicative votes
• Talks are to continue again next week

The latest survey by the Confederation of British Industry (CBI) showed on Friday the UK manufacturers’ order book balance dropped to -5 in April from +1 in the previous month. Economists had expected an increase to +3. That was the lowest reading since October 2018.

According to the report, the gauge measuring output expectations over the next three months dropped to -2 last month from +7 in March export orders declined to -5 from +8 and stocks of finished goods decreased to +9 from +11. In addition, expectations for price inflation in the next three months slowed to +1 from +7 in March.

Karen Jones, analyst at Commerzbank, explains that the GBP/USD pair has eroded the double Fibo retracement at 1.2900/1.2895, but we have not yet closed below here and we would allow for a small rebound into the 1.3000-1.3035 band ahead of further weakness.

“Failure here targets the February low at 1.2772. Below 1.2772 we would allow for losses to the 1.2669/62 15th January low and August low and possibly the 1.2609/78.6% retracement. It is now directly offered below the 1.3033 short term downtrend. Above 1.3217 (25th January high) will introduce scope up to the 1.3351/82 resistance. Initial resistance is the 1.3132 12th April high.”

Analysts at TD Securities point out that the Fitch rating agency will be reviewing the UK’s AA (neg watch) rating, likely quite late in the day and will be a key event today.

“While the possibility of a no-deal scenario has reduced, the path ahead still remains unclear. Thus, we do hold a cautious stance ahead of the review. Spanish elections are on Sunday. We expect PSOE to win the most seats, but with EU and local elections coming in late-May, talks are unlikely to yield a coalition agreement before June. Market reaction is likely to be relatively limited in part due to the lingering coalition uncertainty but also because both main parties are relatively traditional.”

Markets have been lulled into a false sense of calm and are unprepared for the impact of a seismic shift in Chinese economic policy, according to Saxo Bank chief economist Steen Jakobsen.

Statements from the Communist Party’s Politburo signaled that Chinese officials see the growth outlook improving, feeding speculation that Beijing may begin to scale back its stimulus package.

Jakobsen suggested that China’s change in focus from economic support to structural reform will result in a fade in outperformance of Chinese stocks, with the U.S. dollar and U.S. yields breaking higher.

“President Xi seems to be ‘happy’ with progress and performance, now shifting gears to consolidation from what we called ‘the global policy panic,’” he said.

“We are now entering ‘the false stabilization’, where policymakers go from stimulus to autopilot. This coincides with massive momentum divergence signals in China and also in U.S. stock markets, which of course make us sit up and take notice even more.”

Rabobank analysts point out that today should see the first release of US GDP growth for 2019Q1, with recent data pointing at an acceleration in growth during the quarter, largely because growth had been dented earlier in the year by the government shutdown.

“The overall picture, then, is one of slowing growth in underlying terms but still at a somewhat elevated pace compared growth around the turn of the year. The Atlanta Fed’s GDPNow estimate of Q1 GDP growth (quarter-on-quarter, at an annualized rate) stood at 2.7% on April 25, which is the last update before today’s GDP report. The consensus forecast is 2.3%, somewhat lower that the Atlanta Fed’s estimate. However, we should keep in mind that the difference looks bigger in terms of the annualized growth rates used by the BEA (i.e. it is only 0.1%-points in QoQ terms).”

• Rates will eventually turn positive again, but can't say when

• Future rate increase depends on inflation, FX developments.

• Economy will be hurt if rates are increased now

• For now, negative rates remain necessary and appropriate

• SNB remains ready to intervene in FX market as and when needed

• Abandoning negative rates now would hardly improve the situation for savers, pension funds, life insurers and banks.

Most of the economists and researchers are expecting the US Q1 GDP to advance in between 2.2-2.5% despite the impact of the government shutdown.

“We expect GDP to advance 2.3% q/q saar in Q1, largely keeping with the economy’s Q4 pace. Despite a notable slowdown in consumer spending, we anticipate an offsetting shift from negative to positive contributions for net exports and government spending. Indeed, we expect the contribution to growth by private consumption to be around half of what it was in Q4 2018. Notably, and reflecting the recent pick-up in the housing sector, residential investment likely contributed positively to growth for the first time since 2017. All in, a more solid Q1 print suggests less impetus for a particularly large bounce back reflected in the Q2 GDP print.” - TD Securities said.

French Finance Minister Bruno Le Maire said that further cuts to income tax would be matched euro-for-euro by cuts in public spending.

In his response to months of anti-government protests, President Emmanuel Macron said late on Thursday that he would cut income tax further by 5 billion euros.

"The president has set a principle of which I am the guarantor: each euro of decrease in income tax must be financed by a decrease of one euro in public spending," Le Maire told.

Le Maire said the tax cut would benefit 15 million households and target the middle classes in particular. He also said the public deficit and debt would not be allowed to spiral out of control.

Analysts at TD Securities suggest that in line with the unanimous consensus, they expect the CBR to keep its Key Rate on hold at 7.75% at today's Board Meeting.

“At the March meeting the CBR struck a more dovish tone, saying that the impact of the January VAT hikes on inflation was less than they feared and cutting the end-2019 inflation forecast to 4.7-5.2% from 5.0-5.5%, with inflation returning to the 4% target in H1 2020. Furthermore, the CBR admitted the possibility of the Key Rate being cut in 2019. The CBR will be encouraged by the rise in oil prices since the March meeting and in the relative stability of USDRUB, and we expect the CBR to continue with the fairly dovish tone.” We are currently forecasting the first hike to come at the December meeting, but the risks are currently skewed towards it being earlier rather than later than this.”

According to the report from Insee, in April 2019, households’ confidence in the economic situation has been stable: the synthetic index has remained steady at 96. It stands however below its long term average (100).

In April, households’ opinion balance on their future personal situation continued to recover: it has gained 2 points but still remains below its long term average. Households’ opinion balance regarding their past financial situation has been virtually stable and also remains below its long term average. The share of households considering it is a suitable time to make major purchases has increased again. The corresponding balance has gained 3 points and almost returns to its long term average.

In April, the share of households considering it is a suitable time to save has increased sharply. The corresponding balance has gained 11 points and gets closer to its long term average.

However, households’ opinion balance on their saving capacity has declined. The excepted saving capacity balance has decreased clearly: it has lost 4 points therefore equalizing its long term average. The current saving capacity balance also decreased: it has lost 2 points and almost reaches its long term average.

China's massive Belt and Road infrastructure program should only go where it is needed and where the debt it generates can be sustained, International Monetary Fund Managing Director Christine Lagarde said.

Lagarde said the program to build ports, railroads and other trade-enhancing infrastructure was having a positive impact on growth in certain countries but needed to be managed carefully.

She called for a revamped "Belt and Road 2.0" to include increased transparency, an open procurement process with competitive bidding and better risk assessment in project selection.

Lagarde said that Chinese authorities were taking positive steps with a new debt sustainability framework that will be utilized to evaluate projects.

• Some ECB governing council members think that keeping rates at current low levels into next year could be warranted

• In this environment of economic uncertainty and weaker growth, there are grounds for continuing with very stimulating monetary policy.

• The big question now is 'whether the European economy is experiencing a short and temporary phase of slower growth or a longer phase'.

• ECB will know more about whether said uncertainties have started to intensify or ease before the 5 June meeting and that the Central bank is prepared to take any decisions that are necessary in accordance to the situation

• If it is indeed a period of longer economic slowdown, then clearly a more accommodative monetary policy stance will be required

Japan is resisting increasing U.S. pressure to link trade with currency issues as leaders of the two close allies are set to hold a summit in Washington on Friday, with trade and North Korea high on the agenda.

Japanese ministers discussed trade and currency issues with their U.S. counterparts in Washington ahead of the summit between Prime Minister Shinzo Abe and President Donald Trump.

Trump has made clear he is unhappy with Japan's trade surplus with the United States - much of it from auto exports - and wants a two-way deal to fix it.

U.S. Treasury Secretary Steven Mnuchin had said that in future trade deals, including one with Japan, the US would like to include a provision to deter forex manipulation.

Japan has resisted the idea, out of fear that it could tie its hands in monetary policy and any future attempts to keep an unwelcome yen spike in check.

Currencies are a touchy issue for Japan because it has been criticized for keeping the yen low with massive monetary easing.

Analysts at Danske Bank, point out that in the US, we get the first estimate of GDP growth in Q1 today and will be a key release for the day.

“We expect to see a more or less unchanged GDP number for Q1 relative to Q4, 2018. However, a lower than expected number will add to the downward pressure on US Treasuries as political pressure for a rate cut will increase. Today the Bank of Russia (CBR) will announce its monetary policy meeting decision on the key rate. In line with Bloomberg and Reuters consensus, we expect the CBR will keep the key rate unchanged at 7.75%. A softened ECB and Fed stance offers more room for the CBR to start cutting soon. We expect two 25bp cuts in 2019.”

• The politics of Brexit have become more protracted

• As a result, the side-effects on Brexit on the UK economy have intensified

• Capex by businesses have been particularly subdued

EUR/USD

Resistance levels (open interest**, contracts)

$1.1264 (2197)

$1.1247 (522)

$1.1218 (236)

Price at time of writing this review: $1.1137

Support levels (open interest**, contracts):

$1.1119 (2741)

$1.1102 (787)

$1.1083 (2797)

Comments:

- Overall open interest on the CALL options and PUT options with the expiration date May, 3 is 89735 contracts (according to data from April, 25) with the maximum number of contracts with strike price $1,1350 (6908);

GBP/USD

Resistance levels (open interest**, contracts)

$1.3202 (2109)

$1.3107 (1668)

$1.3023 (324)

Price at time of writing this review: $1.2901

Support levels (open interest**, contracts):

$1.2860 (1986)

$1.2826 (1293)

$1.2785 (1702)

Comments:

- Overall open interest on the CALL options with the expiration date May, 3 is 24532 contracts, with the maximum number of contracts with strike price $1,3500 (2425);

- Overall open interest on the PUT options with the expiration date May, 3 is 23136 contracts, with the maximum number of contracts with strike price $1,2750 (2380);

- The ratio of PUT/CALL was 0.94 versus 0.94 from the previous trading day according to data from April, 25

* - The Chicago Mercantile Exchange bulletin (CME) is used for the calculation.

** - Open interest takes into account the total number of option contracts that are open at the moment.