Bribery allegations engulfed Brazil President Temer, mirroring the scandal that toppled his predecessor; European exports surged, while Japan extended its GDP winning streak to a fifth quarter; U.S. manufacturing popped higher.
"I will not step down."
Brazil – who’s next? Just as the economy was showing signs of improvement and investors were feeling more comfortable, Brazil is embroiled in yet another political crisis. Brazil’s BOVESPA stock exchange was up 13.7% for the year at last Monday’s close, but stocks plummeted after news broke that President Michel Temer allegedly encouraged the bribing of a former legislator, losing over 10% on Wednesday and Thursday and 10-year government bond yields surged almost 200 basis points over the same period. On Thursday, Brazil’s currency, the real, suffered its biggest one day drop in over a decade. In early trading Friday, the BOVESPA was only slightly higher. Temer has vowed to fight on, saying he’s done nothing wrong, but his party’s coalition in the lower house of Congress appears to be crumbling and the opposition party has filed an official request for impeachment.
European growth – trading places U.S. growth has generally outpaced Europe in recent years, but that could be changing. The latest report on Eurozone trade showed its surplus with the rest of the world reaching the widest level on record in March as the region's exporters benefited from improving global growth. The surge in exports follows a jump in April’s Composite PMI to a six-year high and an annualized 1Q17 GDP growth rate of 1.8%, which was more than double the 0.7% rate in the U.S. The strengthening economy has bolstered the euro, which has gained 6% versus the US$ this year; and while a stronger euro could dampen exports, it should also help keep the ECB sanguine about inflation and steady in its accommodative policy stance.
Japan – Signs of life Japan’s economy managed its fifth consecutive quarter of growth, the longest stretch since 2006. GDP rose at an annualized rate of 2.2% in the first quarter, well over expectations, helped by a weaker yen, which fueled exports; and by a 0.4% increase in private consumption. The unemployment rate is 2.8%, the lowest in 22 years, but despite that, workers’ total compensation fell by -0.2% in the first quarter when compared with the last three months of 2016—one of the reasons that inflation remained so low, at just 0.2% year over year in March.
U.S. economy – industrial strength Industrial production in the U.S. surged 1.0% in April -- as did manufacturing output, which excludes mining/utility production. "Core" industrial production, which excludes the volatile auto sector, jumped 0.7% in April. Overall, it was the strongest month for manufacturing output and core industrial production since 2014. However, the outlook for capital spending remains muted based on a decidedly lukewarm level of capacity utilization; while it rose to 75.9% in April from 75.2% in March, but remained below the threshold of 80% that usually heralds acceleration in capital expenditures on plant and equipment.
U.S. markets – another shrug U.S. markets have largely shrugged off political uncertainty this year, but there concerns are growing that economic policy may take a back seat to controversy in Washington. Allegations that President Trump had sought to discourage the FBI’s investigation of a former staffer helped spark a -1.8% drop in the S&P 500 last Wednesday, with the VIX index jumping from 10.6 to 15.6 and the benchmark 10-year Treasury yield falling 10 basis points. Yet fears appears to moderated Thursday, with the S&P 500 rebounding +0.4%, the VIX easing back to 14.6, but 10-year Treasury yields were little changed. And while expectations of a Fed rate hike at the June meeting dived briefly on Wednesday, they were sitting at 97.5% early Friday, with some Fed watchers opining that even a market correction might not deter the Fed this time.
Hungary and Poland – revving up GDP growth in Hungary and Poland was 4.1% and 4% respectively in 1Q17 versus 1Q16. Stronger demand from a faster-growing Eurozone is a key factor. Both countries are seeing increased capital spending is increasing and lower unemployment, but inflation pressures remain dormant for now: April CPI in Hungary and Poland was 2.2% and 2% respectively. In Poland wage pressures are being held back by over one million Ukrainians who have found jobs there, increasing the labor force by 3%.
Britain – rainy day data May’s rainy weather seems quite consistent with some cloudy economic news. Consumer price inflation jumped 2.7% in April from a year earlier—the highest pace in more than three years; and marking the third consecutive month inflation has been above the Bank of England’s target rate of 2%. Rising inflation is taking a bite out of consumer’s purchasing power as well—real (inflation-adjusted) wage growth is now negative. However, the Bank of England isn’t expected to make any bold moves with respect to its official bank rate, currently 0.25%, as it sees the jump in inflation as a transitory event driven by the weakened pound.
Sources: Bloomberg, Wall Street Journal, Legg Mason