- The mood in Brazil’s consumer sector is on track to improve again in today’s update
- Germany’s stock-market surge reflects a sigh of relief for France's pro-EU vote
- The US two-year yield is creeping higher again, hinting at more Fed tightening
Expectations for Brazil’s beleaguered economy may get a lift if today’s update on consumer confidence posts another gain for April. Meanwhile, keep your eye on Germany’s DAX stock market index, which has rebounded sharply in the wake of Sunday’s presidential voting in France. In the US, the policy sensitive two-year Treasury yield is inching higher again, raising expectations that another Fed rate hike is near.
Brazil: Consumer Confidence Index (1200 GMT): South America’s largest economy has had a rough ride in recent months, but various political crises and disappointing economic numbers haven’t derailed the country from a path to recovery from its deepest recession in modern times. Today’s update on sentiment in the consumer sector is expected to provide a fresh reminder that the outlook is still brightening.
FGV’s Consumer Confidence Index (CCI) increased to 85.3 in March, the highest level in over two years and the third straight monthly gain. Lower inflation and interest rates may provide support for further improvements in the mood in the months ahead, a spokesperson at FGV noted last month.
In fact, that’s the forecast for today’s update via Investing.com. CCI is expected to post its fourth gain this year, nudging up to 87.0. Support for thinking positively can be found in the central bank’s monthly macro benchmark, which is considered a proxy for Brazil’s GDP. The Economic Activity Index (EAI) rose for a second month in February, increasing 1.3% relative to the previous month – the biggest monthly advance in seven years.
Brazil’s stock market is arguably re-embracing the notion that a recovery is unfolding, based on the recent stability in equities after sliding in March. An upbeat report in today’s CCI will further strengthen the view that Brazil’s rebound, while slower and softer than previously assumed, remains intact.
Germany: DAX Stock Market Index: Emmanuel Macron’s first-place victory in the first round of France’s presidential election on Sunday has been interpreted by investors as a vote of confidence in the European Union, and rightly so. If he prevails in the second round of voting on May 7, as most analysts expect, a Macron presidency would be a clear positive for the Eurozone.
Compared with his anti-globalisation opponent, Marine Le Pen, Macron’s centrist policy stance offers a degree of stability for the EU at a time when the currency bloc’s economic growth is picking up.
Last week’s first-quarter GDP estimate for the Eurozone via Now-casting.com was nearly 0.7%, a moderate improvement over the 0.5% rise in the previous quarter. The pace for the second quarter is expected to tick higher still.
It all adds up to a sigh of relief for the Eurozone outlook. Not surprisingly, the stock market in Europe’s main economy is celebrating. The DAX index surged to a record high on Tuesday. The triumph of the bulls follows better-than-expected news for April business sentiment in Germany via the Ifo Business Climate Index, which rose to a six-year high. “Assessments of the current business situation improved significantly” and “the German economy is growing strongly,” noted the Ifo’s president on Monday.
An expanding economy in Europe, along with relative political stability, only sweetens the deal.
If Macron can hold on to his edge in the polls for next month’s election, the prospects for growth in Europe will remain encouraging. In turn, that’s good news for the Eurozone’s biggest economy (and its stock market), which stands to benefit as the deflationary risks on the Continent continue to wane.
US: Two-Year Treasury Yield: The risk-on trade has returned to US stocks. The S&P 500 surged again on Tuesday, pushing close to the record high set in March. The rally revives expectations that economic growth will improve as the year rolls on, even if Friday’s first-quarter GDP report suggests otherwise, as analysts predict it will.
Economists think that economic output will slow to 1.1% in Q1 from 2.1%, based on Econoday.com’s consensus forecast. The surge in US equities, however, seems to anticipate a firmer economy in Q2 and beyond. In turn, that implies that the Federal Reserve won’t be shy about raising interest rates again.
But Fed funds futures are pricing in a near-certainty of no hike for the May 3 policy meeting. The June FOMC meeting, by contrast, is considered in play; the probability of a rate hike is roughly 68% for this year's midway mark, based on CME data on Tuesday.
Early estimates of Q2 GDP growth, however, don’t look encouraging via Markit’s Composite PMI. “The PMI data suggest the US economy lost further momentum at the start of the second quarter,” said the consultancy’s chief business economist last week.
Perhaps, although it's still early to be making judgments about Q2. Meantime, the policy sensitive two-year yield is on the rise again, edging up to 1.26% in midday trading on Tuesday, a two-week high. One factor that’s convincing traders to sell bonds (and thereby raise yields) is the chatter about President Trump’s tax reform plan, which is expected to roll out this week. One reported feature of the plan is a deep cut in the corporate tax rate to 15% from the current 35% -- a cut that some analysts say would spur economic growth.
“It will be bigger, I believe, than any tax cut ever,” Trump boasted last week.
Will it be big enough to convince the Fed to raise rates next month? Unlikely. But if the rise in the two-year yield endures in the days ahead, the case will strengthen further for expecting a rate hike in June … perhaps a bigger-than-expected hike.
The chief economist at Goldman Sachs thinks that the central bank may be convinced that it should be more hawkish than the crowd expects. “Our analysis suggests … that Fed officials will ultimately raise the funds rate by significantly more than discounted in the bond market,” he wrote in a note to clients.
If that forecast resonates, the main evidence will show up in a higher two-year yield in the days and weeks ahead.
Disclosure: Originally published at Saxo Bank TradingFloor.com