US
- In the US, the most striking piece of data from this past week was the surge in job openings in April. Openings rose a sizeable 259,000, surpassing 6.0 million in total and marking a new all-time high for the series. This is an encouraging development, as the labor market continues to create jobs at a remarkably steady clip. Openings growth was generally broad-based, with gains in the private and public sectors. The few weak spots were concentrated in durable goods manufacturing and retail trade.
- Nonetheless, hiring actually dipped in the month. The job-opening rate has risen dramatically since 2014, but the hiring rate has largely remained steady. The stagnation in hiring and the rising number of job openings suggest structural challenges beneath the cyclically improving labor market. A skills mismatch, uneven job opportunities by geographic region and other factors are weighing on the economy. This dichotomy between cyclical improvement and structural headwinds help explain many of the mixed signals present in today’s labor market. One encouraging development is the location of recent job opening growth: openings are up 25% in the Northeast and 7% in the Midwest, two regions that have seen relatively slower growth this expansion, outpacing the faster-growing regions of the West and South.
- The ISM non-manufacturing index dipped slightly in May to 56.9 (any reading above 50 indicates expansion). The business activity and new orders components declined, but the backlog of orders component reached a cycle-high of 57.0. The survey also showed a jump in employment, although this runs somewhat counter to the May jobs report, which saw private services hiring soften for many sectors. The ISM indices have moderated slightly from their post-election spikes, but both of them remain firmly in expansion territory and above the levels that prevailed in 2016.
- In the factory sector, the slow growth narrative for manufacturing and business spending remained intact. Factory orders fell 0.2% in April, but upward revisions to the March reading helped offset the decline. Core capital goods orders were modestly revised up from the March reading; core capital goods orders have clearly improved after a steep slide that began around when oil prices took a nose dive. After a few months of slow growth, however, core orders are growing at just a 3.8% three-month average annualised rate. Still, the main takeaway is that, modest as the core capital goods figures might be, they suggest that equipment spending had at least some positive momentum heading into Q2.
- Former Federal Bureau of Investigation director James Comey testified before the Senate Intelligence Committee regarding the FBI’s investigation into Russia’s interference in the 2016 US presidential election and President Donald Trump’s desire that the Bureau end its investigation of his former national security advisor Michael Flynn. Comey said he would leave it to Special Counsel Robert Mueller to decide whether the president’s conduct rose to the level of obstruction of justice. With Mueller’s investigation in an early phase, there will likely be many months of continued policy paralysis in Washington.
- The most important event of the week will be the FOMC meeting on Wednesday. Note that this is one of the big meetings with press conference and new ‘dots’. The market has priced in a June hike and consensus estimates are also in favour of a hike, so it is likely that the Fed will do so and make a big announcement on quantitative tightening (QT).
- CPI figures for May are due to be released on Wednesday. CPI and CPI core have been falling rather rapidly since they peaked in February. The estimate for CPI is an increase to 0.0% month-on-month, implying 2.0% year-on-year, whereas for CPI core the expectation is for increase 0.2% month-on-month and 1.9% year-on-year.
- A host of ‘soft’ data will be released, including preliminary University of Michigan Consumer Confidence for June on Friday, NFIB small business optimism for May on Tuesday, Empire manufacturing PMI on Thursday and Philly Fed index.
China
- The pressure for a weakening of the CNY has abated during Q1 2017, and available statistics indicate that strong capital outflows have reversed to muted inflows. The main explanation is likely the halt of the CNY’s weakening versus the USD since early January. Expectations of the future path for USD/CNY seem to be formed primarily by the current direction. Thus, the central bank’s stronger CNY reference rate (or fixing) versus the USD in early January dampened expectations of further CNY weakening and thus moderated outflows.
- Capital outflows are also dampened by tighter capital controls. Some rules have been tightened again following the gradual liberalisations until last year, and some tightening has taken the form of stricter supervision and enforcement of prevailing rules. The tighter capital restriction and the fact that foreign exchange reserves are not even close to being depleted, despite the heavy interventions in recent years to counteract outflows, mean that the authorities are still fully in control of the level of the ex-change rate.
- China is due to release credit growth and data on industrial production, investments and retail sales. Credit growth (Total Social Finance) has slowed over the past six months in response to policy tightening and it will be interesting to see if this continues after China started a crackdown on shadow banking in March. There is a risk that the accumulated tightening in China will send it into a bigger slowdown than generally expected. Activity data on industrial production and fixed asset investments is not the most trustworthy but the sub-components for electricity and steel in the industrial production data have generally been good as leading indicators.
UK
- Prime Minister Theresa May’s gambit to improve her Brexit bargaining position by calling a snap election did exactly the opposite, increasing the uncertainty around the Brexit process. The Conservative Party lost its outright majority in the House of Commons but will be able to form a government with the backing of the 10 members of Northern Ireland’s Democratic Unionist Party. Politically, May is seen as living on borrowed time, and could be replaced as party leader in the near future. Early indications are that May’s failure to secure a larger parliamentary majority undermines the case for a “hard” Brexit, which the Tories campaigned for.
- That is one reason (along with a weaker pound) that markets have taken the election outcome in stride so far. A softer Brexit is seen as less disruptive to UK business interests. One side note: a very poor showing by the Scottish National Party is seen as halting momentum toward a second referendum on Scottish independence.
- The most important event in the UK is the Bank of England (BoE) meeting on Thursday. It is one of the small meetings without an Inflation Report and a press conference, so focus will be solely on the tone in the summary and minutes, as no one expects the BoE to make any changes to its current policy. At its meeting last month, the BoE maintained the hawkish twist to its neutral stance by saying ‘it would take relatively little further upside news … for them to consider that a more immediate reduction in policy support might be warranted’. The base case is that they will maintain this signal but given that GDP growth in Q1 was revised lower to 0.2% quarter-on-quarter from 0.3% quarter-on-quarter against the BoE’s expectations of an increase to 0.4% quarter-on-quarter, risk is tilted towards a more dovish meeting summary.
EU
- The ECB now assesses the risks to the economic outlook as broadly balanced (instead of tilted to the downside). Additionally, forward guidance was changed, as the ECB now sees interest rates remaining at their present levels (excluding or lower) for an extended period of time, well past the horizon of net asset purchases. Finally, the ECB opted to repeat that it is ready to increase the size and duration of the Asset Purchase Programme (APP) if the economic outlook or financial conditions worsen. This was the only slight leftover from the previous long-held easing bias within the ECB.
- The assessment of the economy was more positive, as the ECB now sees stronger momentum and the economy expanding at a faster pace than earlier expected. Furthermore, incoming survey results bolster the ECB’s confidence of solid expansion in the period ahead. Hence, the ECB staff’s GDP forecast was revised up a notch over the three-year forecast horizon. On the other hand, the ECB, as rumoured in markets over recent days, lowered its inflation forecast for the complete forecast horizon, with the biggest adjustments this year and next due to lower forecasts for oil prices. Therefore, the ECB repeated that the firmer economic outlook still does not translate into higher inflation, that underlying inflation is expected to rise only gradually due to slow wage growth, and Draghi stressed that patience is needed.
- In the euro area, the first release of interest is the German ZEW expectations due for release on Tuesday. The figure has risen for four consecutive months to 20.6 in May, and it is expected to rise further to 21.1 in June. Another increase in ZEW is supported by the further increase in the Sentix observed on Monday and the PMI figures from May, which remained broadly unchanged at a high level.
- On Wednesday, the euro area industrial production figures for April are due to be released. After two months of monthly declines of 0.1% in February and March, a small bounce back in April of 0.2% monthly growth is likely.
- Wednesday also brings the Q1 17 employment figures for the euro area. Employment has grown every quarter since Q3 13 and a continued growth in Q1 17 with a figure of 0.3% quarter-on-quarter is likely. The continued employment growth is supported by PMI employment indicators, which continue to show expansion in employment, both in services and manufacturing
Sources: Wells Fargo, MFS Investment Management, Handelsbanken, Danske Bank
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