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Major US stock indexes have risen significantly, as hopes for a decline in interest rates by the Fed have mitigated fears of a further escalation of the trade war with China after recent comments by US President Donald Trump.

Trump said he would decide on additional tariffs for Chinese imports “probably immediately after the G-20.” He made this statement after threatening to introduce import tariffs on Chinese goods for another $ 300 billion.

Investors also tracked ongoing negotiations between the US and Mexico. Trump said yesterday on Twitter that although there was progress in immigration between the two countries, this is “not enough” and recalled that if the parties do not agree, tariffs at the 5% level will be introduced already on Monday with a monthly increase according to the schedule.

Investors are also analyzing US statistics. According to the Ministry of Labor, the initial applications for unemployment benefits did not change and amounted to 218,000, taking into account seasonal fluctuations for the week ending June 1. The data for the previous week was revised to show 3000 requests received more than previously reported. Economists predicted that the number of applications will remain unchanged at 215,000. Recent data suggests that the labor market remains in good condition, despite a slowdown in economic activity.

A report by the Department of Commerce showed that the US trade deficit unexpectedly fell in April, as imports of goods fell to a 15-month low, offsetting a reduction in exports caused by aircraft. According to the report, the trade deficit fell by 2.1% to $ 50.8 billion. The March data were revised upward to show that the trade gap widened to $ 51.9 billion, instead of the previously reported $ 50.0 billion. Economists predicted that the trade deficit would increase to $ 50.7 billion . in April. At the same time, the trade deficit with China increased by 29.7% to $ 26.9 billion.

Almost all of the components of DOW finished trading in positive territory (27 out of 30). The growth leader was Chevron Corp. (CVX; + 2.83%). The Travelers Companies (TRV; -0.55%) were an outsider.

All sectors of the S & P recorded an increase. The largest growth was shown by the base materials sector (+ 1.3%).

At the time of closing:

Dow 25,723.71 +184.14 +0.72%

S & P 500 2,843.69 +17.54 +0.62%

Nasdaq 100 7,615.55  +40.08 +0.53%

Nathan Janzen, the senior economist at the Royal Bank of Canada, notes that Canada’s trade balance narrowed to $1.0 billion in April as nominal exports rose 1.3% and imports declined 1.4%.

• “The improvement in the April trade balance was larger than expected, but the details were not as strong.  Export volumes jumped 1.1%, but a big chunk of that came from a 15% surge in exports of metal and non-metallic mineral products That reflected higher gold exports, an often-volatile component, that is not likely to be repeated going forward.
• A big 2.1% drop in import volumes helped make the net trade balance look better in April – and we continue to expect net trade will retrace about half of the large 4 percentage point drag on overall Q1 GDP growth in Q2.  But lower imports of electrical equipment and the continued retracement of a huge surge in aircraft imports in January also suggests that business investment spending in Q2 will retrace a big chunk of the 40% Q1 gain.
• Broader trends for exports still look relatively uninspiring, non-energy exports are still up only modestly from a year ago by our count.  That is not new, but the US-led escalation in global trade tensions over the last couple of months also leaves some downside risk.”

• U.S. economic indicators show lots of positives
• Says she's concerned about abrupt reversal in economy
• Says IMF fully agrees with the Fed's approach to rates
• Nobody wins a trade war

The Ivey Business School Purchasing Managers Index (PMI), measuring Canada’s economic activity, came in at 55.9 in May, unchanged from April. 

Economists had expected the gauge to hit 56.2. 

A figure above 50 shows an increase while below 50 shows a decrease. 

Within sub-indexes, the employment measure increased to 55.1 in May from 53.7 in the prior month, while the inventories indicator surged to 53.1 from 46.4, the supplier deliveries gauge climbed to 52.4 from 48.7 and the prices index rose to 59.5 last month from 58.9. 

Sonia Meskin, the U.S. Economist at Standard Chartered, thinks the U.S. Fed’s goal is to sustain the current economic expansion, and its key dilemma is that it has a limited set of tools to do so.

• “The Fed policy toolkit is currently set up to deal with a small or moderate shock to growth but not a severe one. This strengthens the case for pre-emptive cuts.
• Our baseline scenario does not build in an all-out trade war. Nonetheless, the threat of further tariffs is likely to affect business sentiment and decision-making, and Fed policymakers have flagged concerns over the impact of trade tensions on broader economic conditions.
• We believe the following would be required for the Fed to refrain from a series of cuts to the federal funds target range (FFTR) this year: (1) no further tariffs on imports from China and no tariffs on Mexico or the EU; (2) no palpable deterioration in employment and confidence indicators and (3) no significant tightening in financial conditions.
• These conditions seemed easier to fulfill a few months ago than they do now. They are not entirely independent, but they could occur separately. The Fed has expressed its willingness to act if there is tangible downside risk. From its perspective, such risks have not yet emerged, but the probability of one or more of them has risen. If data and financial conditions do not deteriorate from here, but trade threats remain heightened, the Fed could limit itself to one or two pre-emptive cuts akin to the Bank of England’s (BoE’s) 2016 ‘insurance’ cut in the wake of the Brexit vote."

• U.S. has a very tight labor force
• Trade tensions have heightened
• Trade relationship with Mexico supports US jobs
• Trade tensions may have a chilling effect on capital expenditures
• Watching trade situation very carefully
• Downside risks right now is to business confidence and capital expenditures but could start to affect hiring and therefore household spending
• Trade with Mexico overwhelmingly in interest of US. Allows US companies to be more globally competitive
• Trade with Mexico a very big deal because trade with that country involves intermediate goods
• Global growth is decelerating
• Slower global growth will spill over into US growth
• U.S. won't be immune to global growth slowdown
• corporate debt burden could amplify economic weakness
• Severity of climate events may start to impact economic performance if they become more frequent
• Fed needs to be open to learning about just how tight the labor market can become before inflation pressures become apparent
• Disruption to jobs in US today primarily driven by technology; blaming it on globalization potentially leads to poor policy decisions
• He sees Fed policy in the neighborhood of neutral right now
• He expects to and year with about 2% inflation, labor market to tighten further
• Watching credit spreads, not the stock market
• Too soon to make judgement on rate cut because of trade tensions, but is concerned that downside risks have increased
  
• He does think yield curve inversion is significant but needs to see that it has some size and some duration

U.S. stock-index futures traded flat on Thursday, as hopes of an interest rate cut offset an escalation in trade tensions after the U.S. President Donald Trump threatened fresh tariffs on Chinese goods.

Global Stocks:

• Uncertainty about global trade has increased since March
• Data about the economy are not bad
• There isn't a substantial worsening in the outlook, that's why the extension is for seven-months
• Drop in market-based inflation expectations is global, certainly something we take into account
• There is no probability of deflation
• There is still confidence in the baseline forecasts but uncertainty is prolonged and increased. We had hopes some would be removed. These risks have gained importance
• Our readiness to act in case of contingencies was an important part of our discussions and it was more granular. 'Several' members raised the possibility of rate cuts
• The view that we should pursue our goals in a symmetric fashion was also discussed
• There was a long discussion about whether negative rates were hampering bank profitability that could hamper lending. So far we see no aggregate effect but it's not taken for granted there wouldn't be if we cut further, so that's why there is a mention of 'mitigating effects' in the statement
• Financing conditions have become slightly tighter. This reflects lower stock prices, stronger euro
• Members raised possibility of rate cuts, APP restart, further extension in forward guidance
• The decision today was unanimous
• Italian government's debt reduction plan has to be credible
  

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The U.S. Commerce Department reported on Thursday the U.S. the goods and services trade deficit narrowed to $50.8 billion in April from a revised $51.9 billion in the previous month (originally a gap of $50.0 billion).

Economists had expected a deficit of $50.7 billion.

According to the report, the April decrease in the goods and services deficit reflected a decline in the goods deficit of $1.0 billion to $71.7 billion and a gain in the services surplus of $0.1 billion to $20.9 billion.

Exports of goods and services from the U.S. fell 2.2 percent m-o-m to $206.8 billion in April, while imports also decreased 2.2 percent m-o-m to $257.6 billion.

Year-to-date, the goods and services deficit rose $4.1 billion, or 2.0 percent, from the same period in 2018. Exports increased $8.3 billion or 1.0 percent. Imports went up $12.4 billion or 1.2 percent.

Statistics Canada announced on Thursday that Canada’s merchandise trade deficit stood at CAD0.97 billion in April, narrowing from a revised CAD2.34 billion gap in March (originally a CAD3.21-billion deficit). That was the smallest trade gap since October 2018.

Economists had expected a deficit of CAD2.80 billion.

According to the report, the country’s exports increased 1.3 percent m-o-m in April, due mainly to higher exports of metal and non-metallic mineral products (+15.0 percent m-o-m), particularly gold.

Meanwhile, imports fell 1.4 percent m-o-m in April, mostly on lower imports of aircraft and other transportation equipment and parts (-23.6 percent m-o-m).

DuPont (DD) initiated with a Hold at SunTrust; target $79

Apple (AAPL) initiated with a Outperform at Evercore ISI; target $205

Travelers (TRV) downgraded to Mkt Perform from Outperform at Keefe Bruyette; target $153

The data from the Labor Department revealed on Thursday the number of applications for unemployment benefits remained unchanged last week, indicating the jobs market remains tight even as the economy slows.

According to the report, the initial claims for unemployment benefits stood at 218,000 for the week ended June 1.

Economists had expected 215,000 new claims last week.

Claims for the prior week were revised upwardly to 218,000 from the initial estimate of 215,000.

Meanwhile, the four-week moving average of claims fell 2,500 to 215,000 last week.

U.S.-Mexico talks on immigration, tariffs will continue Thursday at U.S. State Department

• Main refinancing rate left at 0.00%
• Marginal lending facility kept at -0.25%
• Deposit facility remained at -0.40%
• Expects the key ECB interest rates to remain at their present levels at least through the first half of 2020, 
• To reinvest QE debt for an extended period of time after first rate hike
• Rates will remain likely where they are until inflation reaches its 2 percent target
• Prices that the interest rate in each TLTRO operation will be set at a level that is 10 basis points above the average rate applied in the Eurosystem’s main refinancing operations over
• Says that TLTRO rate can be as low as the average interest rate on the deposit facility plus 10 basis points

• We will continue relations with OPEC
• We have differences over what is a fair oil price
• Saudi Arabia wants a higher oil price
• Oil price at $60-$65 per barrel is perfectly fine for us
• Falls in Iran, Venezuela, problems in Libya, Nigeria should be taken into account
• We will take consolidated decision with OPEC colleagues

• If economy continues to perform as expected, upward pressure on prices is likely to build
• Any rises in interest rates are expected to happen at a gradual pace
• And will happen to a limited extent

• Skeptical that the threat of EU fines will be an "effective incentive" for Italy
• Says that the absence of credible strategy continues to expose Italy to adverse shifts in investor sentiment
• Believes that Italy's 2020 budget will be an important milestone in assessing the direction of the country's creditworthiness

Analysts at TD Securities expect the U.S. trade balance to widen modestly in April to $50.7 billion, following a minor increase in the trade gap in March.

“This would be in line with our view that net exports are likely to be less of a contributor to growth to Q2 activity after a notable shrinking of the trade deficit supported Q1 GDP growth.”

According to Carsten Brzeski, ING's chief economist in Germany, first industrial data for the second quarter keeps the hope of a gradual industrial recovery alive. Industrial orders were up by 0.3% MoM in April, increasing for the second month in a row from an upwardly revised 0.8% MoM in March. On the year, industrial orders were down by 5.3%, from -5.9% YoY in March. Excluding bulk orders, new orders were even up by 2.1% MoM. This is some welcome relief for German industry.

• "German industry is still suffering from global uncertainty on the back of trade conflicts. Since last summer foreign orders have dropped by a monthly average of 0.6%. At the same time, however, domestic demand has also weakened, particularly since the start of the year. While domestic new orders remained stable in the second half of 2018, they collapsed in the first quarter, dropping by a total of 7% between January and March. Today's strong numbers only marginally offset the losses of the first months.
• Interestingly, despite the order deflation, businesses still report filled pipelines of assured production. At the same time, however, another sharp increase in inventories brings back the memories of last year and does not really bode well for industrial production in the months ahead.
• All of this means that while today's industrial order data is defintely good news and gives reason for moderate optimism, it will still take a while before industry returns as a powerful growth engine for the entire German economy."

Analysts at TD Securities think that Canada’s international trade for April will give an early look at economic activity for Q2.

• “TD looks for the trade deficit to improve to $2.9 bn on weaker import activity, partially offset by a pullback in non-energy exports. We also see a risk of downward revisions to March on the heels of Q1 national accounts, which all else equal would imply a larger deficit for April.”

Bank of Japan Governor Haruhiko Kuroda warned of the potential dangers of heavy money printing, saying that financial bubbles, when accompanied by excessive lending by commercial banks, tend to trigger financial crises.

Kuroda said the G20 members must focus on implementing the financial reforms they launched in 2009 to prevent another financial crisis.

"Financial bubbles tend to associate with financial crises when accompanied by excessive credit creation," Kuroda said.

"Our experience of Japan's crisis in the late 1990s and of the last global financial crisis in the late 2000s reminds us that the most important role of financial regulation and supervision is to address market failures in order to prevent financial crises," he added.

Kristoffer Kjær Lomholt, senior analyst at Danske Bank, points out that more dovish hints from the Fed and a weak ADP employment report temporarily sent EUR/USD up to 1.13 yesterday before the cross more than erased gains on the non manufacturing ISM.

“The market will likely need a significant dovish shift from the ECB today to be inclined to sell EUR/USD, i.e. rate cuts and/or QE on the table. We think the ECB will have a hard time living up to market expectations as it becomes clear that the Fed is one step ahead of ECB in the dovish shift. Hence, we do not look for the ECB to derail recent positive EUR/USD momentum.”

Eurostat said, the number of persons employed increased by 0.3% in both the euro area and the EU28 in the first quarter of 2019 compared with the previous quarter. In the fourth quarter of 2018, employment increased by 0.3% in the euro area and by 0.2% in the EU28.

Compared with the same quarter of the previous year, employment increased by 1.3% in the euro area and by 1.2% in the EU28 in the first quarter of 2019 (after +1.3% and +1.2% respectively in the fourth quarter of 2018). These data on employment provide a picture of labour input consistent with the output and income measure of national accounts.

Based on seasonally adjusted figures, Eurostat estimates that in the first quarter of 2019, 240.7 million people were employed in the EU28, of which 159.5 million were in the euro area. These are the highest levels of employment ever recorded in both areas. More specifically, the number of persons employed has increased by 10.8 million in the euro area and 16.6 million in the EU28 since the lowest level of employment after the financial crisis (2013 Q2 for euro area, 2013 Q1 for EU28).

According to an estimate published by Eurostat, seasonally adjusted GDP rose by 0.4% in the euro area (EA19) and by 0.5% in the EU28 during the first quarter of 2019, compared with the previous quarter. In the fourth quarter of 2018, GDP had grown by 0.2% in the euro area and by 0.3% in the EU28.

Compared with the same quarter of the previous year, seasonally adjusted GDP rose by 1.2% in the euro area and by 1.5% in the EU28 in the first quarter of 2019, after +1.2% and +1.5% respectively in the previous quarter.

During the first quarter of 2019, household final consumption expenditure rose by 0.5% in both the euro area and the EU28 (after +0.3% and +0.4% respectively in the previous quarter). Gross fixed capital formation increased by 1.1% in the euro area and by 1.3% in the EU28 (after +1.4% and +1.1%). Exports increased by 0.6% in the euro area and by 0.5% in the EU28 (after +1.2% and +1.5%). Imports increased by 0.4% in the euro area and 1.2% in the EU28 (after +1.2% and +1.3%).

• IMF views that ECB monetary policy accommodation remains necessary

• IMF views that there is a small undervaluation in the euro exchange rate

• IMF views that euro area countries with high debt like Italy should create more fiscal space by implementing structural reforms

Deutsche Bank analysts point out that the July FOMC meeting is now priced in for 21bps of cuts, with 88bps of cuts priced in for the next 12 months.

“The market is still priced for a very dovish shift in policy. Friday’s jobs report is looking ever-more pivotal for the Fed and for markets. Despite the firming market expectations for rate cuts, the 2s10s curve actually bull steepened to 27.7bps (over 30bps intra-day and 28.8bps this morning) and to the steepest since November last year with 10y yields down a more modest -0.9bps (down a further -2.5bps this morning though). In three days the curve has actually steepened more than +8bps and it continues to defy inversion unlike most of the other common yield curve measures in the US.”

Japan will explain to G20 members its plan to proceed with a planned sales tax hike in order to fund social security for all generations, the top government spokesman said on Thursday.

Japan's economy is underpinned firmly by fundamentals that support domestic demand, Chief Cabinet Secretary Yoshihide Suga told a regular news conference, adding that Tokyo would roll out offsetting measures as planned to ease the impact of the higher levy.

According to analysts at Danske Bank, focus in markets remains on US trade talks - with short-term emphasis on Mexico, and speculation of central bank easing for most notably the Fed.

“Today's highlight is the ECB meeting. We expect the ECB to maintain its easing bias, with no new additional stimulus measures announced. The update of the staff projections is unlikely to change much for inflation, but we see a downside risk to the 2020-21 growth forecast from its already low level. We will also get more information on the TLTRO3 terms, which we expect to be favourable in light of the ongoing struggles of the economy. We will also get euro area GDP details for Q1. We will closely monitor the domestic demand drivers and see how they fared; private consumption and fixed investments were probably strong judging from the German figures already released.”

According to the report from IHS Markit, eurozone construction firms recorded a further rise in activity midway through the second quarter, but the pace of growth eased to the softest for four months. A key factor behind the slowdown the first decline in new orders since last August. Meanwhile, firms continued to increase both their staff numbers and input buying, albeit at slower rates compared to April. On the cost front, input prices continued to rise markedly. However, the rate of inflation decelerated to the softest for 22 months

Falling 52.1 in April to 50.6 in May, the Eurozone Construction PMI pointed to a marginal rise in total construction activity, with the rate of growth easing from April. Across the euro area's three largest economies, the quickest expansion was seen in Germany, followed by France. Meanwhile, Italian builders reported their first decline in activity since March 2018, although it was only fractional overall.

The strongest-performing sub-sector was again housing. Although the rate of growth eased and was only modest overall, home building recorded an increase in activity for the ninth month in a row. There was also a slight rise in commercial activity, with the pace of expansion decelerating from April. However, civil engineering work fell at the fastest rate since July 2016.

Italy needs a big deficit correction for this year and next to avert a European disciplinary procedure over its deteriorating public finances, European Commission Vice President Valdis Dombrovskis told on Thursday.

“What is needed is a substantial deficit correction in 2019 and 2020,” Dombrovskis said in an interview published a day after the Commission opened the way to a possible disciplinary procedure that would trigger a clash with Rome’s anti-austerity government.

Dombrovskis also said that a planned tax-cutting reform backed by the right-wing League - which governs in coalition with the anti-establishment 5-Star Movement - could be very expensive and help to further deteriorate Italy’s public finances.

Markets are getting too far ahead of themselves in expectations for the Federal Reserve to cut rates, according to Goldman Sachs President and Chief Operating Officer John Waldron.

• The market is pricing in a fairly substantial set of moves by the Fed.

• I worry a little bit that the market is too optimistic about how much and how soon the Fed will move.

• The market is currently pricing in more than a hundred basis points in cuts now.

• The Fed will be more reliant on the data than they will on the short-term sentiment.

Boosting liquidity to the financial system on Thursday, China's central bank signaled its readiness to supply smaller banks with a steady stream of cash after the takeover of a troubled lender, letting more banks access the funds.

The People's Bank of China (PBOC) lent 500 billion yuan (£57 billion) to financial institutions via its medium-term lending facility (MLF), offsetting 463 billion yuan worth of MLF loans maturing on the same day. It left the interest rate for the one-year MLF unchanged at 3.30 percent.

Money market traders said the central bank has steadily expanded the list of qualified recipients for the liquidity tool this year, allowing more smaller lenders to directly tap longer-term funds.

Based on provisional data, the Federal Statistical Office (Destatis) reports that price-adjusted new orders in manufacturing had increased in April 2019 a seasonally and calendar adjusted 0.3% on the previous month. Economists had expected a 0.1% increase.

For March 2019, revision of the preliminary outcome resulted in an increase of 0.8% compared with February 2019 (provisional: +0.6%). Price-adjusted new orders without major orders in manufacturing had increased in April 2019 a seasonally and calendar adjusted 2.1% on the previous month.

Domestic orders decreased by 0.8% and foreign orders rose by 1.1% in April 2019 on the previous month. New orders from the euro area were down 5.8%, new orders from other countries increased 5.7% compared to March 2019.

In April 2019 the manufacturers of intermediate goods saw new orders fall by 0.4% compared with March 2019. The manufacturers of capital goods showed increases of 0.9% on the previous month. For consumer goods, an increase in new orders of 0.1% was recorded.

EUR/USD

Resistance levels (open interest**, contracts)

$1.1314 (5062)

$1.1279 (2972)

$1.1257 (2042)

Price at time of writing this review: $1.1231

Support levels (open interest**, contracts):

$1.1208 (3643)

$1.1181 (5646)

$1.1143 (3307)

Comments:

- Overall open interest on the CALL options and PUT options with the expiration date June, 7 is 126202 contracts (according to data from June, 5) with the maximum number of contracts with strike price $1,1500 (9050);

GBP/USD

Resistance levels (open interest**, contracts)

$1.2806 (512)

$1.2764 (814)

$1.2732 (1001)

Price at time of writing this review: $1.2687

Support levels (open interest**, contracts):

$1.2636 (1602)

$1.2595 (2004)

$1.2548 (840)

Comments:

- Overall open interest on the CALL options with the expiration date June, 7 is 41883 contracts, with the maximum number of contracts with strike price $1,3450 (3277);

- Overall open interest on the PUT options with the expiration date June, 7 is 39065 contracts, with the maximum number of contracts with strike price $1,2800 (3618);

- The ratio of PUT/CALL was 0.93 versus 0.94 from the previous trading day according to data from June, 5

* - 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.