U.S. Trade Deficit Expands to an 18-month High, Eurozone Bond Yields Rise After Hawkish Rate Cut

Alexander Garcia
06 Jun, 2024
Miami

Stocks lacked direction and hovered near record highs reached in the previous session. 

The S&P 500 index and the Nasdaq Composite meandered ahead of the release of nonfarm payroll data on Friday. 

Investors are hoping that the increase in payroll will moderate, confirming the latest softer increase in private payrolls reported by ADP on Wednesday. 

Economists are estimating nonfarm payrolls to rise at a slower pace than the increase of 175,000 in April. 

The moderating labor market conditions are likely to confirm that economic growth is intact and the labor market is strong but not too hot, giving policymakers room to consider a rate cut later in the year. 

Initial weekly jobless claims for the week ended on June 1 increased by 8,000 to 229,000, according to the latest weekly report from the U.S. Labor Department. 

The previous week's level was revised up by 2,000 from 219,000 to 221,000. 

The 4-week moving average was 222,250, a decrease of 750 from the previous week's revised average.

At the same time, continuing claims unexpectedly rose by 2,000 to 1.79 million for the week ending May 25. 

In a separate report, the Bureau of Labor Statistics reported that nonfarm productivity increased by 0.2% in the first quarter, while unit labor costs rose by 0.4%. 

 

U.S. Trade Gap Widened in April 

The U.S. goods and service trade deficit widened in April after imports rose faster than exports, the U.S. Bureau of Economic Analysis reported Thursday. 

Exports edged up 0.8% to $263.7 billion, and imports rose 2.4% to $338.2 billion, resulting in a trade deficit increase of 8.7% to $74.6 billion. 

Goods exports increased $2.2 billion to $172.7 billion, and services exports decreased $0.2 billion to $90.9 billion.

The increase in exports of electric apparatus, semiconductors, electric machinery, and pharmaceutical preparation was offset by a decline in industrial supplies and financial services. 

Imports of goods advanced $8.1 billion to $271.9 billion, and services declined $0.1 billion to $66.3 billion. 

The increase in imports of capital goods, vehicles, computer accessories, telecommunications, and insurance services was offset by a decline in travel services. 

 

U.S. Indexes and Treasury Yields

The S&P 500 index decreased 0.2% to 5,342.12, and the Nasdaq Composite fell 0.3% to 17,137.01.

The yield on 2-year Treasury notes edged lower to 4.75%, 10-year Treasury notes decreased to 4.31%, and 30-year Treasury bonds edged higher to 4.46%.

WTI crude oil increased $1.43 to $75.50 a barrel, and natural gas prices rose 1 cent to $2.75 a thermal unit.

Gold increased by $19.03 to $2,373.95 an ounce, and silver rose $1.24 to $31.23. 

The dollar index, which weighs the U.S. currency against a basket of foreign currencies, edged lower to 104.21.

 

U.S. Stock Movers

Lululemon Athletica jumped 3.8% to $319.99 after the athletic apparel retailer reported higher than expected first quarter earnings and sales. 

Five Below declined 15.3% to $112.43 after the discount retailer estimated weaker-than-expected revenue in the current quarter. 

Nvidia Corp. advanced 0.9% to $1,234.28 after the company at the center of the artificial intelligence boom extended this year's gains to over 150% and a one-year surge to over 216%. 

Robinhood Markets increased 3.5% to $22.36 after the online trading company agreed to acquire crypto exchange Bitstamp for $200 million. 

 

European Markets Advanced After Hawkish Rate Cut

Benchmark indexes in Europe advanced for the third day in a row after the European Central Bank delivered on the widely anticipated rate cut. 

Market indexes in Frankfurt, Paris, and London advanced between 0.3% and 0.7% after the ECB cut three key lending rates by 25 basis points for the first time since 2016. 

The ECB lowered only one of the three key lending rates, the deposit facility rate, in 2019. 

Investors are also looking forward to comments from ECB president Christine Lagarde about the possibility of additional rate cuts in the year. 

Most market participants are looking for at least one rate cut in September or December. 

In other economic news, Switzerland's jobless rate held steady at 2.3% in May compared to the previous month, the Secretariat for Economic Affairs announced Thursday. 

 

ECB Cut Rates as Expected and Signaled Restrictive Stand 

The European Central Bank lowered its three key lending rates by 25 basis points from record highs. 

The move was widely advertised by the central bank, but policymakers stressed that price pressures are still high and rates are likely to remain elevated for the foreseeable future and well into next year. 

The ECB's Governing Council lowered the main refinancing rate to 4.25%, the deposit facility rate to 3.75%, and the marginal lending rate to 4.5%. 

"Based on an updated assessment of the inflation outlook, the dynamics of underlying inflation, and the strength of monetary policy transmission, it is now appropriate to moderate the degree of monetary policy restriction after nine months of holding rates steady," the ECB Governing Council said in a statement released after the policy meeting held Thursday. 

The central bank lowered all three rates for the first time since the last cut in March 2016. 

The central bank lowered the rate after inflation eased by 2.5 percentage points since September 2023, driven in large part by the decline in energy prices. 

The policy committee's staff revised the overall and core inflation estimates for 2024 and 2025. 

The staff projected the overall inflation in 2024 as averaging 2.5% and 2.4% in 2025, and the core inflation as 2.8% and 2.2%, respectively. 

The economic growth estimate was revised higher to 0.9% in 2024 and 1.4% in 2025. 

 

Eurozone Retail Sales Edged Lower In April

In other economic news, eurozone retail sales decreased 0.5% in April, following a downwardly revised 0.7% increase in March, Eurostat reported Thursday. 

Sales of food, drinks, and tobacco fell 0.5% in April after rising 1% in the previous month, and auto fuel sales decreased 2.2%, reversing the 1% gain. 

Nonfood sales declined 1% in April, matching the rate of decline in the previous month. 

On an annual basis, retail sales were unchanged following a 0.7% rise in March. 

 

German Factory Orders Declined In April

Real factory orders, adjusted for seasonal and calendar factors, in Germany decreased by 0.2% from the previous month in April, the Federal Statistical Office, or Destatis, reported Thursday. 

On an annual basis, new orders declined 1.6%.

Incoming orders in a three-month period to April declined 5.4% from the previous three-month period, mainly due to a large order in December 2023. 

Excluding the large orders, new orders in April were 2.9% higher than in March and 1.4% lower in the three-month period between February and April than the previous three-month period. 

The decline in orders was widespread, and orders declined in four key sectors. 

Incoming orders for electric equipment declined 4.1%, mechanical engineering fell 1.5%, aircraft, ships, and trains dropped 15.4%, and electronic and optical products fell 5.1%. 

However, orders in the automotive industry rose 4.1%, offsetting the overall decline in incoming orders. 

Domestic orders declined by 0.3%, and foreign orders fell by 0.1%, driven by a 1.4% decline in orders from the eurozone, while orders from the rest of the world rose by 0.6%. 

 

Europe Indexes and Yields

The DAX index increased by 0.4% to 18,652.67; the CAC-40 index rose by 0.4% to 8,040.12; and the FTSE 100 index advanced by 0.5% to 8,285.34. 

Bond yields advanced after the ECB lowered rates but held out or higher rates longer citing elevated inflationary pressures. 

The yield on 10-year German bonds edged higher to 2.55%; French bonds inched higher to 3.04%; the UK gilts edged lower to 4.17%; and Italian bonds inched higher to 3.86%.

The euro edged higher to $1.087; the British pound inched higher to $1.276; and the U.S. dollar weakened to 89.11 Swiss cents.

Brent crude increased $1.51 to $79.92 a barrel, and the Dutch TTF natural gas fell by €0.29 to €33.09 per MWh.

 

Europe Stock Movers

N Brown Group soared 31% to €0.17 after the online fashion retailer reported a profit in its fiscal year 2024. The company also estimated sales would improve in the current fiscal year. 

Hargreaves Services jumped 2.4% to 573.68 pence, and the company estimated pre-tax earnings marginally ahead of market expectations. 

In Paris trading, Carrefour declined 0.8% to €14.82, Capgemini rose 1.2% to €194.30, and L'Air Liquide rose 1% to €186.46. 

In Frankfurt trading, BMW advanced 0.1% to €91.48, Deutsche Bank gained 1.5% to €15.24, Deutsche Lufthansa declined 0.7% to €6.32, and Siemens AG decreased 1% to €177.04. 

 

Nikkei Jumps 1% Following the Tech Rally In New York 

Market indexes in Tokyo jumped, following a tech-stock-driven rally in overnight trading on Wall Street. 

Benchmark indexes jumped as much as 1% after tech stocks rallied in Tokyo and the market advanced broadened to most sectors in the early afternoon.

The semiconductor stocks in Tokyo advanced following the record high at Nvidia in New York, which lifted the S&P 500 index and the Nasdaq Composite to new highs. 

The Japanese yen held firm at 155.89 against the U.S. dollar, and the yield on the 10-year Japanese government bonds fell below 1% for the first time in two weeks. 

 

Japan Stock Movers 

The Nikkei 225 Stock Average jumped 0.7% to 38,751.57, and the Topix index advanced 0.4% to 2,759.05. 

Tech stocks led the gainers, and Tokyo Electron, Advantest, and Screen Holdings jumped between 1.5% and 5%. 

SoftBank jumped 1.3% to ¥9,545.0 after activist investor Elliott Investment acquired a $2 billion stake in the company with the aim of pushing the tech conglomerate to buy back $15 billion of its own stock. 

The news was first reported by the Wall Street Journal and confirmed by two traders in Tokyo and New York. 

Ocean shipping companies were in focus again, and Kawasaki Kisen Kaisha jumped 4.2% to ¥2,465.0 and Nippon Yusen advanced 2.6% to ¥5,018.0. 

Energy companies traded higher despite the recent weakness in crude oil prices. 

Idemitsu Kosan jumped 3% to ¥1,072.0, INPEX gained 0.02% to ¥2,313.0, and Iwatani jumped 2.6% to ¥9,458.0. 

On the downside, Alps Alpine declined 5.5% to ¥1,463.0, and Mercari dropped as much as 3% to ¥2,023.50. 

 

 

China Stocks Advanced Ahead of Exports Data, Property Sales Remain Depressed 

Stocks in Shanghai and Hong Kong advanced, and the yuan remained under pressure for the second consecutive week.

Benchmark indexes advanced ahead of the release of international trade data on Friday, and economists are estimating export growth to accelerate above 5% in May. 

Market sentiment was also bolstered after Country Garden reported rising residential property unit sales in May, following the increase reported by China Vanke. 

Policymakers are hoping that recent supportive measures announced by local authorities and the People's Bank of China may encourage more property transactions. 

Despite the cautious optimism, markets are worried that the long-term economic growth trajectory is on the decline, which is likely to negatively impact corporate earnings growth. 

The National Bureau of Statistics is set to announce international trade data on Friday, and economists are looking for exports to jump by as much as 5% amid rising global demand for electric vehicles and industrial machinery. 

Investors are also awaiting the release of import growth, which generally signals the health of domestic demand. 

 

China Stock Movers 

The CSI 300 index increased 0.4% to 3,610.63, and the Hang Seng index advanced 0.5% to 18,508.73. 

Country Garden decreased 3.1% to $5.62 despite the residential property developer reporting rising sales in May, according to filings with the Hong Kong Stock Exchange. 

Contracted sales in May increased by 11.4% to 440,000 square meters from 430,000 square meters in April. 

Sales increased to 4.29 billion yuan, or $592 million, from 3.85 billion yuan in April. 

Despite the recent pick-up in activities, sales declined 76% from a year ago after dropping 83% in April, indicating the government measures are not working as fast as anticipated and the incipient recovery is still limited to tier-1 cities. 

Nationwide residential property sales by the top 100 Chinese developers increased 3.4% from the previous month in May to 322.4 billion yuan, still down about 34% from a year ago, according to the data released by the China Real Estate Information Corporation.