US
Economic data largely beat consensus expectations over the past week, with positive signs from the factory sector and homebuilding. The positive data stream continued with reports on housing, industrial production, and consumer prices all suggesting a constructive tone.
Industrial production rose for the first time in three months on the back of solid gains in utilities and manufacturing. Housing starts also rebounded, setting the stage for further improvement moving into the important summer months.
The age-old tango between the Fed and markets continues. First, hawkish Fed chatter sets the market up for tighter policy, then investors tremble and the dollar rises, and ultimately policy makers get cold feet and delay tightening.
This time-worn dance has played out frequently since the 2013 “taper tantrum”—when then-Chair Bernanke hinted at slowing the QE drip-line. But this time, the Fed seems to be sticking to its guns. Alongside the also hawkish minutes from their April meeting, the Fed looks increasingly likely to go ahead with another interest rate rise in the near future, so long as data continues to cooperate and the global economy remains out of the headlines.
The better data suggest the economy has picked up in the second quarter to an above potential rate. For the Fed, this points to more progress in labour markets, a key precondition for the second stage of rate lift-off.
Pay close attention to the “all-in” unemployment rate in the May jobs report, which has been eking out steady progress this year despite slower payrolls growth and a steady official jobless rate.
UK
The price pressure in the economy is still weak. The rate of inflation fell from 0.5% in March to 0.3% in April, mainly due to falls in airfares and prices for clothing, vehicles and social housing rent. These downward pressures were partially offset by rising prices for motor fuels and for certain recreational goods and cultural services, and by food prices, which were unchanged between March and April 2016 after having fallen between the same two months a year ago.
Latest labour market statistics between Q4 2015 and Q1 2016, the number of people in work increased, the number of unemployed people was little changed, but the number of people not working and not seeking or available to work (economically inactive) fell. The employment rate (the proportion of people aged 16 to 64 who were in work) was 74.2%, the highest since comparable records began in 1971.
Retail sales in April surprised positively and the figures for March were revised upward. In April, retail sales including fuel increased by 4.3% compared to April last year and sales excluding auto fuel increased by 4.2% during the same period.
EU
In the euro area attention will be on the PMI figures for May. Supported by stronger foreign demand and better financial sentiment, the manufacturing PMI improved slightly in April after having been on a downward trend in Q1. Notably the order-inventory balance, which is usually a good leading indicators for the manufacturing PMI, improved in April and is pointing to a small further rise in the figure. However, financial sentiment has turned less optimistic during May and with the uncertainty connected to the upcoming UK referendum, weaker business sentiment is to be expected within the manufacturing sector.
In line with the above, the German IFO business expectations is expected to weaken slightly in May. This should also be the case for the ZEW investor expectations as financial sentiment is less optimistic than in April.
Consumer confidence for May is also released next week and in line with the business sentiment it improved in April after peaking in March last year. The continued rapid decline in the unemployment rate points to better sentiment among consumers but the higher oil price is a headwind. The higher oil price is negative for consumers’ purchasing power and due to that slightly weaker growth in private consumption is expected.
A couple of prominent ECB members are scheduled to speak next week including vice president Constancio and chief economist Peter Praet. The latter is usually very dovish but at the end of April he said “deploying negative rates again in the future would require a distinct worsening of the inflation outlook” and both members are expected to stick to the ECB’s current patient view where it waits to see the impact of the measures announced in March.
China
April activity and monetary data came in much weaker than expected, suggesting that the data improvement in March was short-lived.
More importantly, fiscal policy became less aggressive. Recent commentaries from official sources (People’s Daily) said that the credit-fuelled model is not sustainable. All these make the market more skeptical regarding China’s outlook.
Sources: Danske Bank, BMO Capital, Commerzbank, TD Economics, Wells Fargo.
