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Major US stock indices grew, but only slightly, as the protracted trade conflict between China and the US continued to put pressure on the markets.

A senior Chinese diplomat said that provoking trade disputes is “naked economic terrorism”, and the media reported that China has suspended purchases of soybeans in the United States due to a trade dispute. However, US President Donald Trump said that the United States are doing well in trade negotiations with China and that Beijing wants to make a deal with Washington.

Market participants also analyzed a block of important macroeconomic data. Thus, the report of the Ministry of Commerce showed that the US economic growth accelerated in the first quarter, but there are signs that the temporary growth of exports and the accumulation of stocks are already weakening, and production in factories is slowing down. US GDP in the first quarter grew by 31% year on year, the government reported in the second reading of the GDP report. In the period from October to December, the economic growth was 2.2%. While the government has reduced its initial estimate for investment in stocks, export growth has been boosted. These two volatile components were key drivers of GDP growth in the first quarter.

At the same time, the Ministry of Labor reported that the number of initial applications for unemployment benefits increased moderately last week, which indicates that the labor market remains in a stable position even in the conditions of economic slowdown. According to the report, the number of applications for unemployment benefits rose by 3,000, a seasonally adjusted 215,000 for the week ending May 25. The data for the previous week was revised to show 1,000 calls more than previously reported. Economists had forecast an increase in the number of applications by 215,000 over the past week.

A report released by the National Association of Realtors (NAR), pointed to an unexpected reduction in pending home sales in April. According to the report, the index of pending home sales fell in April by 1.5% to 104.3, after rising 3.9% in March (revised from + 3.8%) to 105.9. Economists had expected the index to grow by 0.9%.

Most of the components of DOW finished trading in positive territory (19 in positive territory, 11 in negative). The growth leader was McDonald's Corp. (MCD; + 1.66%). The outsider was Verizon Communications Inc. stock. (V; -2.32%).

Most sectors of the S & P recorded an increase. The technological sector grew the most (+ 0.4%). The largest decline was in the raw materials sector (-0.7%).

At the time of closing:

Dow 2,788.86 +5.84 + 0.21%

S & P 500 25,169.88 +43.47 + 0.17%

Nasdaq 100 7,567.72 +20.41 + 0.27%

The U.S. Energy Information Administration (EIA) revealed on Wednesday that crude inventories fell by 0.282 million barrels in the week ended May 24. Economists had forecast a decrease of 1.360 million barrels.

At the same time, gasoline stocks surged by 2.204 million barrels, while analysts had expected a drop of 0.800 million barrels. Distillate stocks declined by 1.615 million barrels, while analysts had forecast an increase of 0.750 million barrels.

Meanwhile, oil production in the U.S. increased by 100,000 barrels a day to 12.300 million barrels a day.

U.S. crude oil imports averaged 6.9 million barrels per day last week, down by 81,000 barrels per day from the previous week.

Analysts at Wells Fargo note the data released today showed a revision of Q1 GDP from 3.2% initially reported to 3.1% due mostly to a more tepid pace of intellectual property spending and an outright decline in equipment outlays.

• "The slight slowing in first quarter growth is largely due to a softening in business spending. There was a slightly slower growth rate for intellectual property spending. Equipment spending went from a scant 0.2% gain in the first estimate to an outright decline of 1.0% in the revision.
• The three largest quarterly inventory builds of the past three and a half years have occurred back-to-back in the past three quarters. 
• Without the boost from inventories, GDP growth in Q1 would have only been 2.5%. Yet, there is no sign that the stockpiling is over. In a separate release this morning we learned that wholesale inventories grew 0.7% in April handily exceeding the estimate of a scant 0.1% gain.”

The National Association of Realtors (NAR) announced on Thursday its seasonally adjusted pending home sales index (PHSI) fell 1.5 percent m-o-m to 104.3 in April, down from 105.9 in March.

Economists had expected pending home sales to rise 0.9 percent m-o-m in April.

On y-o-y basis, the index dropped 2.0 percent. That was the 16th consecutive month of annual declines.

According to the report, the pending home sales declined in three of the four regions in m-o-m terms but fell in all regions compared to April 2018. Pending home sales in the South dropped 2.5 percent m-o-m to an index of 124.0 in April, which is 1.8 percent lower than last April. The PHSI in the Northeast went down 1.8 percent m-o-m to 88.9 in April and is now 2.1 percent below a year ago. The index in the West decreased 1.8 percent m-o-m in April to 93.5 and fell only 1.5 percent below a year ago. Meanwhile, the index in the West dropped 1.8 percent m-o-m in April to 93.5 and fell only 1.5 percent below a year ago. 

Statistics Canada reported the country’s current account (C/A) gap widened by CAD0.7 billion to CAD17.3 billion in the first quarter of 2019 from an upwardly revised CAD16.6 billion in the previous period (originally a gap of CAD15.5 billion).

Economists had expected a CAD18 billion shortfall.

According to the report, wider C/A deficit reflected a higher trade in goods and services deficit (+CAD1.2 billion to CAD9.1 billion in the first quarter), which, however, was moderated by a lower investment income deficit (-CAD0.2 billion to CAD1.2 billion).

U.S. stock-index futures rose moderately on Thursday, as investors took a breather after a drastic selloff the day before, which was driven by worries about impacts of the U.S.-China trade tensions on global economy.

Global Stocks:

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

Tesla (TSLA) price target cut to $150 from $192 at Barclays

Verizon (VZ) downgraded to Neutral from Buy at UBS

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

According to the report, the initial claims for unemployment benefits rose 3,000 to 215,000 for the week ended May 25.

Economists had expected 215,000 new claims last week.

Claims for the prior week were revised upwardly to 212,000 from the initial estimate of 211,000.

Meanwhile, the four-week moving average of claims fell 3,750 to 216,750 last week.

A report from the Commerce Department showed on Thursday that the U.S. economy grew slightly slower than initially thought in the first quarter of 2019, due to downward revisions to nonresidential fixed investment and private inventory investment and upward revisions to exports and personal consumption expenditures (PCE). Meanwhile, imports, which are a subtraction in the calculation of GDP, were revised up. Nonetheless, the general picture of economic growth remains the same. 

According to the second estimate, the U.S. gross domestic product (GDP) grew at a 3.1 percent annual rate in the first quarter, slightly lower than a gain of 3.2 percent reported in the advance estimate. 

Economists had expected the growth rate to come in at 3.1 percent, following the fourth quarter's increase of 2.2 percent. 

The increase in real GDP in the first quarter reflected positive contributions from PCE, private inventory investment, exports, state and local government spending, and nonresidential fixed investment that were partly offset by a negative contribution from residential fixed investment. Imports, which are a subtraction in the calculation of GDP, fell.

At the same time, the acceleration in real GDP 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. These movements were partly offset by decelerations in PCE and nonresidential fixed investment, and a downturn in federal government spending. Imports turned down.

• State-owned enterprises confident in helping to keep economic growth

Imre Speizer, an analyst at Westpac, notes that today’s NZ budget had little for FX markets, with the sovereign credit rating (S&P AA, positive outlook) continuing to be supported by solid fiscal metrics.

• “Projected operating surpluses were smaller due to extra spending, but still positive, and net debt increased but remains close to 20% GDP – low compared to most peers.
• At the margin, given the larger-than-expected spending projected, there’s arguably less need for monetary policy easing, which should be NZD supportive.
• However, the dominant force on NZD/USD is the US dollar’s uptrend which remains intact, and should continue to propel NZD/USD towards 0.6425 over the next month.”

• Says the first priority is an election
• Says the public deserves the right toe elect a new government
• says there has to be a thought process to prevent a no-deal Brexit
• If an agreement gets through parliament, then it should go to a public vote

James Rothwell, Brexit & Europe correspondent for The Daily Telegraph, tweets: "I'm told Germany will veto an extension to Article 50 at the next EU summit in October unless the UK makes major progress, such as announcing a general election or a second referendum. Story on Telegraph website shortly".

TD Securities' analysts point out that the Bank of Canada's (BoC) senior Deputy Governor Wilkins will deliver an economic progress report at 14:15 ET to provide additional context to Wednesday's policy statement.

• “Her speech will be followed by an audience Q&A with a formal press conference scheduled to follow at approximately 15:50 ET.
• On the data front, the market looks for the current account deficit to widen to roughly $17.9bn in Q1 due to a deterioration in the merchandise trade balance, while CFIB Small Business Optimism for May and SEPH (payrolls) employment for March will round out the calendar. The LFS reported that 13k jobs were lost in March (excluding self-employed) although we would note that ADP, which is designed to replicate SEPH, reported job growth of 76k for the same month.”

Analysts at TD Securities are expecting the U.S. Q1 GDP to be revised lower to 3.0% from 3.2% in the advance estimate.

• “This would leave Q1 growth sitting well above trend, although Q2 is shaping up to be softer with nowcasts from the NY and Atlanta Fed in the 1.3-1.4% range.
• Advance economic indicators for April and initial jobless claims will round out the data flow; the market consensus is for jobless claims to edge higher to 215k from 211k for the week of May 25, while the advance goods trade deficit is expected to widen to $72.7bn.
• Lastly, the Fed's Clarida will speak to the Economic Club of New York at 12:00 ET.”

ANZ's analysts note that, for the global markets, the major shift of the past month has been the deterioration in the tone of the U.S.-China trade negotiations.

• “Since the last round of talks, when disagreements on the final text of the agreement arose, both sides have hardened their stance, and the likelihood of a resolution has diminished.
• Added to these concerns is the possibility that some of the recovery we saw in demand for semi-conductors was driven by Chinese companies front-loading purchases. This combination means that the hopes of recovery, which were underpinning market sentiment and liquidity, are looking fragile again.
• In particular, the recent rise in the liquidity index looks like it could be short-lived and the market will again find itself in a low growth and low liquidity context, where the momentum for both is once again negative. This is an environment where volatility is higher and where cyclical currencies underperform.
• The policy reaction function will, in our view, be too slow to come to the rescue (via a large scale shift in official liquidity) in the near term. The Chinese response remains targeted, while the US Fed will need to see a substantial and sustained deterioration in financial conditions before it acts, given the strength still evident in the labour market. Within this context, we remain bearish on cyclical currencies.
• While the outlook for the major currencies has remained largely unchanged, we have drastically cut our forecasts for risk sensitive, cyclical currencies.”

According to Richard Franulovich, head of FX strategy at Westpac, high and rising trade frictions will upset the US outlook via sentiment channels and a tightening of financial conditions but the prospect of pre-emptive Fed cuts matching market expectations (75bp by end-2020) remains dim.

“Comparisons with the 75bp in insurance cuts in 1995 and 1998 are misplaced; those episodes were associated with a more material cooling in wages and inflation than has recently been the case. Recession risk remains manageable too; the 10yr-3mth curve is inverted but the ISM is above 50 and equities and credit have not deteriorated that much (yet). It’s not clear that trade frictions and ongoing Fed cut speculation will adversely impact the USD anyway; the USD index has been enjoying a slow grind higher all year regardless whether trade tensions are rising as they are now or subsiding as they were through Q1. The global macro picture surely won’t be reassuring for a range of currencies in the unlikely event that the Fed cuts rates.”

China hopes the United States will respect facts and market laws, and refrain from politicizing the issue of currency exchange rates, a Foreign Ministry spokesperson said.

"China has repeatedly advised the U.S. to act according to multilateral international rules instead of unilaterally assessing other countries' currency exchange rates," spokesperson Lu Kang said at a daily press briefing.

Lu's comments came after the U.S. Treasury Department said on Tuesday that no major trading partner of the U.S., including China, met the standard of currency manipulation, though it put China, Germany, Ireland, Italy, Japan, the Republic of Korea, Malaysia, Singapore and Vietnam on its "monitoring list."

China will steadfastly deepen the market-oriented reform of its currency exchange rate, continue to improve the floating exchange rate system based on the market supply and demand and with reference to a basket of currencies, and work to keep the renminbi exchange rate basically stable, reasonable and balanced, Lu said.

Analysts at TD Securities, note that the Bank of Canada left rates unchanged at 1.75% in May, as universally expected, while balancing a more constructive view on the domestic economy against a more uncertain global outlook, caused by the escalation in US/China trade tensions.

“There was no change to the Bank's forward guidance, which notes that the current accommodative policy remains appropriate pending the evolution of household spending, energy sector dynamics, and global trade tensions.”

Britain's economy is likely to grow less than the Bank of England forecast earlier this month as Brexit uncertainty hurts investment and productivity, Deputy Governor Dave Ramsden said.

Ramsden said rates would need to rise if Brexit went smoothly, but a disruptive Brexit would make the right path for monetary policy an open question.

Even if Brexit does go smoothly, it would be unlikely to dispel all business uncertainty, he said, so investment might pick up less than the BoE had forecast, hurting short-run growth and the economy's longer-run productive capacity.

"Relative to the best collective judgement expressed in the MPC's central forecast I am ... a little more pessimistic on GDP growth than my colleagues on the MPC," he told.

The BoE forecast this month that the economy would grow by 1.5% this year and 1.6% in 2020 if Brexit goes smoothly.

As China's economy shifts from high-speed growth to high-quality development, economic activity can be sustained by a relatively slower rate of monetary expansion, a senior central bank official said.

The pace of growth in broad M2 money supply had previously exceeded the nominal rate of expansion in gross domestic product (GDP), but the economy has changed, said Sun Guofeng, head of the monetary policy department at the People's Bank of China (PBOC).

M2 money supply in April grew 8.5% from a year earlier, slightly less than the previous month, and new bank lending in April also slowed.

"In recent years, with China's economy turning from high-speed growth to high-quality development, economic growth has tended to be lighter," Sun said. "A relatively slower pace of monetary growth can meet the needs of keeping economic operation within a reasonable range."

The PBOC will make more efforts in optimising the structure of money supply while maintaining a stable total amount, Sun said.

There is ample room in China's monetary policy to deal with internal and external challenges, Sun reiterated, given the PBOC's "rich" policy toolkit.

Karen Jones, analyst at Commerzbank, points out that EUR/GBP cross continues to hold below the February peak at .8842 and they would allow for a small dip lower.

“Dips should remain well supported by the March high at .8723 and below here should find support around the .8685 April high and the 55 day ma at .8645. Above .8842 lies the 61.8% retracement at .8870 that in turn guards the .8980 78.6% Fibonacci retracement. Strong support below the 55 day moving average comes in at the March and current May lows at .8471/65. Directly above there lies the 200 week moving at .8467 and we look for this to hold the downside. Below .8465 would allow for a sell-off to the April 2017 low at .8314.”

Citi discusses the EUR outlook around next week's ECB June policy meeting.

"Markets also now eye the ECB June 6th meeting where a decision about (1) TLTRO lending rate likely to be less generous as per recent ECB speak, and (2) a possible extension to the calendar-based part of forward guidance on interest rates though with euro short rates now pricing the first ECB hike in Q4’2021, an extension of ECB forward guidance is unlikely to have much impact. However, with euro zone (especially German) manufacturing data weak and leading to the continuing decline in market based longer term inflation expectations to 2016 lows (reflected in German Bund yields now at -16bp and only 4.4bp away from the 2016 record lows), it is difficult to see how the ECB can be anything but dovish at its June 6th meeting – likely to limit any rebound in EURUSD until then".

According to the flash estimate issued by the INE, the annual inflation of the CPI in May 2019 was 0.8%. This indicator provides a preview of the CPI that, if confirmed, would imply an increase of two tenths in the annual rate, since in April this change was 1.5%.

This behaviour highlights the decrease in the prices of electricity compared to the increase experienced in 2018. Also influences that the prices of fuels rise this month less than last year.

In turn, the annual variation of the flash estimate of the HICP in May stands at 0.9%. If confirmed, the annual rate of the HICP would decrease seven tenths with respect to the previous month.

According to the flash estimate of the CPI, consumer prices registered a variation of 0.2% as compared with April.

The data released today is an advance of the final CPI and HICP data, which will be published next month. Until then, the results are available in INEbase.

Britain should slow the rate at which it increases its minimum wage to avoid the risk of low-paid workers being priced out of a job during the next recession, an anti-poverty think tank said.

The Resolution Foundation welcomed the rapid minimum wage increases that Britain's Conservative government had ordered since 2015, but said further rises should be done more cautiously.

Britain's unemployment rate has fallen to its lowest since 1975 at 3.8% and employment is at a record high, despite the minimum wage rising by more than a quarter since 2015 to stand at 8.21 pounds an hour for those aged 25 and over. However, the Resolution Foundation warned that it was dangerous to assume these economic good times would last.

"The minimum wage is at a crossroads," it said. "Policymakers seeking to combine ambition with caution might wish to aim for a still fast - but slightly slower rate - of increase than recently seen."

The Resolution Foundation said a minimum wage of about 10 pounds an hour would be needed to eliminate 'low pay', using a common definition of earnings that are less than two thirds of the median hourly wage. "Such an ambitious move would transform the labour market," Resolution Foundation analyst Nye Cominetti said.

The head of a Japanese business lobby said a planned sales tax hike should proceed in October to sustain the social security system for a rapidly ageing population, despite calls from elsewhere to postpone it given growing economic challenges.

"Economic uncertainties persist even now but I don't think they will morph into a crisis on the scale of a Lehman shock, so I want (the hike) to proceed. With just a few months left before October, it's impossible to delay it again," said Akio Mimura, head of the Japan Chamber of Commerce and Industry.

While a tax hike could hurt growth, it would also help Japan achieve fiscal reform in the long run, which will more than offset the near-term pain, Mimura told.

The government plans to spend 2 trillion yen in offsetting measures, which Mimura said should help ease the tax hike pain "to a considerable degree". Further delays could cause confusion to many Japanese firms that have made significant preparations to overcome the shift to the 10% sales tax, Mimura added.

On monetary policy, Mimura urged the Bank of Japan to make its policy more flexible over the long run, given the increasing side effects from prolonged easing, such as a hit to banks' profits.

According to the report from Society of Motor Manufacturers and Traders (SMMT), British car manufacturing output plummeted by almost half in April.

70,971 cars rolled off production lines in the month, down -44.5% year on year as factory shutdowns, rescheduled to mitigate against the expected uncertainty of a 29 March Brexit, took effect in many plants across the UK.

Manufacturing for domestic and overseas markets fell -43.7% and -44.7% respectively as most volume manufacturers brought forward, and extended, production stoppages normally scheduled for the summer holiday period.

April’s dismal performance, the 11th straight month of decline, exacerbated the underlying downward trend, due largely to slowing demand in key international markets, including the EU, China and the US, as well as at home.

In the year to date, 127,240 fewer cars have been built compared with the same period in 2018 – a decline of more than a fifth (-22.4%) – with similarly large percentage falls in production for the UK and export.

According to Karen Jones, analyst at Commerzbank, EUR/USD pair has failed to make any impression on the 55 day moving average at 1.1228 and the market is once again weighing on the downside.

“We need to overcome the 55 day moving average, last week’s high at 1.1264 and the 2018-2019 downtrend at 1.1302 in order to alleviate downside pressure and reassert upside interest. This is a tall order at present and is likely to take several attempts. Intraday rallies are indicated to fail around 1.1160. Be advised that as long as the recent lows at 1.1110/06 hold the pattern being traced out is a potential large bullish reversal pattern. Support at 1.1110/06 is regarded as the break down point to the 2018-2019 support line at 1.1033 and the 1.0814 78.6% Fibonacci retracement.”

• China's economy is stable despite global uncertainties

• Relatively slower money supply can still meet economic needs

Bank of Japan board member Makoto Sakurai said the central bank would consider steps to mitigate the demerits of its ultra-easy policy if doing so became necessary in future.

For now, the central bank does not need to take such steps or ramp up stimulus, Sakurai told a news conference.

"We don't need to take additional easing steps now. We can watch developments for the time being. If economic developments take a turn for the worse, we may consider taking action," he said.

EUR/USD

Resistance levels (open interest**, contracts)

$1.1305 (4782)

$1.1259 (2963)

$1.1219 (1601)

Price at time of writing this review: $1.1136

Support levels (open interest**, contracts):

$1.1112 (4170)

$1.1081 (3819)

$1.1040 (3257)

Comments:

- Overall open interest on the CALL options and PUT options with the expiration date June, 7 is 121589 contracts (according to data from May, 29) with the maximum number of contracts with strike price $1,1500 (9016);

GBP/USD

Resistance levels (open interest**, contracts)

$1.2904 (570)

$1.2810 (383)

$1.2729 (747)

Price at time of writing this review: $1.2631

Support levels (open interest**, contracts):

$1.2606 (3995)

$1.2586 (1769)

$1.2559 (2157)

Comments:

- Overall open interest on the CALL options with the expiration date June, 7 is 40578 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 40114 contracts, with the maximum number of contracts with strike price $1,2700 (3995);

- The ratio of PUT/CALL was 0.99 versus 1.00 from the previous trading day according to data from May, 29

* - 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.