U.S. Letter, Week beginning May 2
Last week, all eyes in the financial markets were on the Federal Reserve's April meeting, company earnings, and the first quarter GDP data.
- Interest rate unchanged
The Federal Open Market Committee (FOMC) members decided to keep the interest rate unchanged in a 9-1 vote as markets largely expected. Kansas City's Esther George once again dissented from inaction and called for an immediate 25 basis point increase.
"The labor market conditions have improved further even as growth in economic activity appears to have slowed. Growth in household spending has moderated, although households' real income has risen at a solid rate and consumer sentiment remains high," said the FOMC statement which offered no specific hints on whether policy makers are leaning toward a June hike or postponing it to later in the year.
- Reaction to unchanged rate
The dollar weakened after the Fed kept rates unchanged and the Bank of Japan (BoJ) surprised markets by holding interest rates steady and declined to adopt more stimulus. Meanwhile, the yen surged almost 3 percent against the euro and dollar in one day after BoJ's announcement and closed the month with a 5 percent gain against the dollar.
Gold and some other commodities also pared gains as investors moved away from the U.S. dollar.
- Company earnings
With 62 per cent of companies having reported their earnings as of last week, many including Facebook, Amazon, UPS and eBay were able to beat analysts’ estimates.
On the other hand, Apple reported fiscal second-quarter results last Tuesday that included a couple of new firsts for the company: the first year-over-year decline in quarterly revenue since 2003 and the first slide in iPhone sales.
The company's shares dropped about 9 percent immediately after the earnings release and continued to fall for the next eight days, leading to the longest streak of losses since 1998.
- Economic data
According to official figures announced last week, the real U.S. gross domestic product (GDP) grew only by 0.5 percent in the first quarter of 2016. Consumer spending, rising by 1.9 percent, helped hold up the first-quarter real GDP which came in just below the market forecast of 0.6 percent.
Another positive contribution came from residential investment, up 14.8 percent, which was the highlight of the report. However, a sharp 5.9 percent decline in nonresidential investment and lower net exports, reflecting weak oil drilling and low global demand, were negative factors for a second quarter in a row.
The report provided mixed inflation data with the GDP price index up only 0.7 percent in the first quarter, down from 0.9 percent in the fourth quarter of 2015 while the core GDP deflator came above expectations at 1.9 percent, up from 1.2 percent in the fourth quarter.
Moreover, March new home sales came in at a 511K annualized rate, which was on the low side of expectations. However, the report included a 7K upward revision to 519,000 for February which now stands as among the very best months since 2008.
March durable goods orders were up 0.8 percent but lower than expected following a 3.1 percent decline in February.
Lastly, Personal Income and Outlays report by the U.S. Commerce Department showed that American consumers remained cautious despite higher income.
Personal outlays rose only 0.1 percent in March, following 0.2 percent gains in February and January. Incomes were up 0.4 percent in March following gains of 0.1 and 0.4 percent in the first two months of the year.
- New week ahead
This week comes with critical data release for the U.S. economy: the employment report for April.
The report, which will be officially released on Friday, May 6, may play an important role for the Fed's next policy meeting in June. Investors are expecting another strong non-farm payroll gain at 200K and a slightly lower unemployment rate at 4.9 percent.
Other data releases of the week include ADP Private Employment, international trade statistics, consumer credit, weekly petroleum inventories and unemployment claims.
Several Fed officials are lined up to speak on the economy and the markets will be closely watching their messages since no clear sign was given regarding the timing of the next rate hike in last week's FOMC announcement.