| USA Nonfarm payrolls rose 339K in May, a lot more than the median economist forecast calling for a +195K print. This positive surprise was compounded by a +93K cumulative revision to the previous months’ data. Employment in the goods sector advanced 26K in the month, as a 25K gain in the construction segment was only partially offset by a 2K decline in manufacturing. Jobs in services-producing industries, for their part, expanded no less than 257K, with notable increases for health/social assistance (+75K), professional/business services (+64K), leisure/hospitality (+48K) and transportation/warehousing (+24K). After two consecutive declines, the temporary help services category saw payrolls increased 8K. Employment in the public sector progressed 56K, with gains at both the state/local (+49K) and federal (+7K) levels. Average hourly earnings rose 4.3% YoY in May, down from 4.4% the prior month and one tick below consensus expectations. MoM, earnings progressed a consensus-matching 0.3%. On a 3-month annualized basis, earnings were up 4.0% compared with 3.8% the prior month The ISM Manufacturing PMI slid from 47.1 in April to 46.9 in May, marking a seventh straight contraction in factory activity and the second steepest since the early months of the pandemic. Output (from 48.9 to 51.1) expanded for the first time in six months, albeit at a marginal pace. New orders (from 45.7 to 42.6), meanwhile, fell further below the 50-point mark separating expansions from contractions. Despite weaker demand conditions, the employment gauge (from 50.2 to 51.4) signalled a second straight expansion in payrolls. Signs of further supply chain improvements were clearly visible in the report. Indeed, the input price tracker (from 53.2 to 44.2) fell for the sixth time in eight months, with survey respondents attributing the drop to softer raw material prices. Supplier delivery times (from 44.6 to 43.5), for their part, shrank the most since March 2009. This, combined with weaker demand conditions, allowed firms to catch up on unfilled orders, as evidenced by the sharpest drop in work backlogs (from 43.1 to 37.5) in more than 14 years Construction spending jumped 1.2% in April after increasing 0.3% the prior month. The monthly gain reflected increased spending in both the public sector (+1.1%) and the private sector (+1.3%). Within the latter, spending on residential projects advanced 0.5%, while outlays on non-residential structures surged 2.4%. After outperforming during the pandemic, residential construction now seems to be running out of steam, which is not surprising given the significant rise in mortgage rates and the marked slowdown in the home resale market. However, non-residential construction appears to have picked up the baton, advancing no less than 10.8% in the past four months. Relative to their pre-crisis level, private construction outlays in the residential and non-residential segments are now up 39.2% and 25.6%, respectively The S&P CoreLogic Case-Shiller 20-City Home Price Index rose for the first time in nine months in March, climbing 0.45%. Price increases in Detroit (+1.42%), New York (+1.09%), and San Diego (+1.00%) were only partially offset by declines in Seattle (-0.90%) and Phoenix (-0.38%). YoY, prices were down 1.15% at the national level, marking the first decline for this indicator since 2012. Although demand remains relatively weak on the real estate market, very tight supply, combined with a strong labour market, is likely to push prices upward in the coming months. That said, only modest gains are likely occurred between now and the end of the year, as purchasing power continues to suffer from elevated borrowing costs The Job Openings and Labor Turnover Survey (JOLTS) showed that the number of positions waiting to be filled rose from 9,745K in March (initially estimated at 9,590K) to 10,103K in April. As a result of this increase, the ratio of job offers to unemployed persons rose from 1.67 to 1.79, significantly above this indicator’s pre-pandemic level. The monthly gain was led by retail trade (+209K), health care/social assistance (+185K), transportation (+154K), and construction (+68K). Alternatively, job postings declined in the following categories: accommodation (-80K), government (-71K), and professional/business services (-57K). Total separations fell from 5,994K to 5,708K on declines for both layoffs (from 1,845K to 1,581K) and voluntary resignations (from 3,842K to 3,793K). The quit rate (i.e., number of voluntary separations as a percentage of total employment) ticked down from 2.5% to 2.4% and is now roughly back in line with its pre-pandemic level The Conference Board Consumer Confidence Index sank from 103.7 in April to a six-month low of 102.3 in May. The monthly decline reflected a less optimistic assessment of the current situation, with the associated index slipping from 151.8 to a still-elevated 148.6. The share of respondents who deemed jobs plentiful at present dropped from 47.5% to a 25-month low of 43.5%. Longer-term expectations deteriorated as well, albeit less so than previously: The sub-index tracking sentiment towards the next six months edged down from 71.7 to 71.5. A smaller proportion of respondents had a positive outlook on business conditions (from 14.1% to 12.9%, an 11-and-a-half-year low) and employment (from 14.3% to 13.6%, a seven-year low) The Fed’s Beige Book was that overall economic activity stagnated in late April and early May. Consumer spending expanded slightly, as did manufacturing production. Activity in the real estate sector was mixed, with a slight improvement in the residential segment largely offset by a deterioration of conditions in the commercial sector. Manufacturing output increased marginally as supply chain issues continued to improve. Demand for transportation services, meanwhile, was down, especially in trucking. Financial conditions were stable or somewhat tighter in most Districts A bill codifying an agreement reached over the weekend between the White House and Speaker of the House Kevin McCarthy passed the US House of Representatives and the US Senate, landing it on President Biden’s desk on Friday, where it is expected to be signed into law. The Fiscal Responsibility Act suspends the debt limit through 1 January 2025, kicking that particular can down the road until after the 2024 presidential election. The fiscal drag from the package is estimated at about 0.2% of GDP President Joe Biden’s nominee for Vice Chair of the US Federal Reserve, sitting Governor Philip Jefferson, said Wednesday that skipping a rate hike at the June FOMC meeting would allow the Fed time to assess incoming data, but said a pause would not indicate that rates are at their peak. Inflation is too high and progress has slowed recently, Jefferson told a conference in Washington. Philadelphia Fed President Patrick Harker, a voting member on this year’s FOMC, suggested that with policy in restrictive territory, the Fed should skip a hike in June and that if more tightening is needed it can be done every other meeting. However, contradictory payroll and employment figures on Friday now further cloud the Fed’s path The major benchmarks ended with solid gains for the week, with the S&P 500 Index touching its highest intraday level since mid-August 2022. The technology-heavy Nasdaq Composite Index notched its sixth consecutive weekly gain and hit its best level since mid-April 2022. In contrast with the past several weeks, however, the rally was broad-based, with strong gains in both value and growth stocks, as well as small-caps. Markets were closed on Monday in observance of Memorial Day The ISM Services Index is out on Monday. The ISM services index briefly slipped below the 50-threshold designating expansion from contraction late last year, but has since been in expansion the past four months. Data continue to signal that services sector activity is broadly holding up, and the ISM services index is expected to increase modestly to 52.0 in May. The ISM manufacturing index slid further in May, signaling the seventh straight month of contraction in the sector. The divergence in services and manufacturing activity is clearly evident in the prices paid components of the two surveys, which have diverged substantially over the past couple of months. The services prices paid measure remains consistent with a broad expansion in prices across the industry, a top concern of the Fed on its campaign to quell inflation The trade balance is out on Wednesday. International trade flows are volatile on a MoM basis. After widening sharply in the wake of the pandemic, the U.S. trade deficit has narrowed on trend since early last year. A sharp widening is likely in the trade balance to -$75.3 billion in April. The advance data on merchandise trade revealed that the goods trade deficit widened to a six-month high amid a plunge in export growth. Goods exports slid 5.5%, driven by weakness in industrial supplies and consumer goods, though every category other than the volatile foods & feeds looks to have declined. Imports look to have bounced back with advance goods imports up 1.8% amid a gain in autos. Services should provide a slight offset to the widening on the goods side amid continued activity. UK Money and Credit data for April has come through. Mortgage lending was down GBP -1.38bn, while mortgage approvals stood at 48.69 thousand. The expectation remains for the number of house sales to drop by 40% from peak to trough and the data confirms that sales numbers are falling even faster than valuations. Consumer Credit was GBP 1.586bn, in line with consensus and now tracking pre-pandemic levels, households’ balance sheets benefited from the repayment of a good deal of credit during lock-downs. Savings continue to shift from low-paying current accounts to higher-paying time deposits, again deposit flows are in line with pre-pandemic levels While UK inflation fell in April from 10.1% to 8.7%, this was much less than had been generally expected by investors, who had forecast inflation to be closer to 8.2%. Moreover, core inflation, which strips out volatile food and energy prices, went up from 6.2% to 6.8%; core inflation is followed closely by the Bank of England’s Monetary Policy Committee (MPC) and so this rise is likely to be viewed with particular concern. However, inflation is likely to continue to fall over the coming months, albeit less slowly than anticipated. The Bank of England has in its latest Monetary Policy Report revised its forecast on the likely path for inflation and it too now expects inflation only to reach the target rate of 2% towards the end of 2025. However, more immediately, the fact that lower energy prices have not fed through with the expected impact on the CPI, combined with a sharp rise in food prices, is going to prompt the Monetary Policy Committee to act The Bank of England embarked upon a tightening of interest rates from their all-time low of 0.1% in December 2021, and since then interest rates have been raised at every meeting of the MPC, reaching their present level of 4.5% in May. Three points of note: Interest rates are already well above their neutral level, (approximately 2.5%) and so further rapid rate rises are going to further reduce economic activity. Secondly, any interest rate rise can take approximately 18 months to filter through to the broader economy; thus, the already implemented rate rises have yet to have their full effect. Finally, the Bank of England’s is reversing Quantitative Easing (QE) with Quantitative Tightening (QT). While there has been some research suggesting that the prevailing economic backdrop means the impact of QE was more significant than the what can be expected with QT, there is a good deal of uncertainty, as this unwinding has not been done before Business confidence in the UK retreated to its long-term average of 28% in May, after three months of rising optimism, according to a monthly sentiment index compiled by Lloyds Bank. UK companies surveyed by the Bank of England in May indicated that they intend to raise output prices and wages over the coming year, although they expect the pace to slow relative to a month ago. They plan to raise prices by 5.1%, down from 5.9% in April’s survey. Expected pay increases clocked in at 5.2% compared with the 5.4% recorded in the prior month. EU Eurozone inflation in May was below expectations at 6.1 percent YoY, compared to 7.0 percent the month before. The monthly change was 0.0 percent. Food, alcohol & tobacco is expected to have the highest annual rate in May (12.5 percent, compared with 13.5 percent in April), followed by non-energy industrial goods (5.8 percent, compared with 6.2 percent), services (5.0 percent, compared with 5.2 percent) and energy (-1.7 percent, compared with 2.4 percent). Core inflation was also below expectations at 5.3 percent compared to 5.6 percent the month before. The HICP releases in May (April) for major eurozone countries were as follows: France 6.0 percent (6.9), Germany 6.3 percent (7.6), Italy 8.1 percent (8.7) and Spain 2.9 percent (3.8) The next ECB monetary policy meeting is on June 15. The ECB is expected to raise policy rates by 25 basis points at the June and July meetings. Despite the decline in inflation, the core inflation remains at an uncomfortably high level for the ECB. Therefore, after the summer hikes, the ECB is expected to hold policy rates steady, as an extended period of restrictive monetary policy is needed to lastingly bring inflation down European Central Bank (ECB) President Christine Lagarde reiterated in a speech that inflation was still too high and “it is set to remain so for too long.” She added: “That is why we have hiked rates at our fastest pace ever—and we have made clear that we still have ground to cover to bring interest rates to sufficiently restrictive levels.” The minutes of the ECB’s May meeting showed most policymakers voted to slow the pace of rate increases to a quarter point but signaled an appetite to tighten monetary policy further A European Commission survey showed that economic sentiment weakened more than expected, with this indicator slipping to 96.5 in May—its lowest level since November 2022. A stagnating economy, elevated inflation, and rising interest rates weighed on morale. Sentiment deteriorated among manufacturers, service providers, retailers, and constructors. However, consumers were slightly less pessimistic, as households became more positive about their financial situation In local currency terms, the STOXX Europe 600 Index was little changed. The pan-European index clawed back losses after data showed that eurozone inflation had slowed, and the U.S. Senate approved a bill to suspend the statutory limit on government borrowing. Major stock indexes were mixed. CAC 40 Index gave back 0.66% of its value while in Italy, the FTSE MIB advanced 1.33%. CHINA China’s official manufacturing Purchasing Managers’ Index (PMI) fell to a below-forecast 48.8 in May from April’s 49.2, marking the second consecutive month of contraction and the lowest reading since December 2022. A reading above 50 represents an expansion from the previous month. Production activity fell into contraction for the first time since January, dragged down by declines in new orders and exports. The nonmanufacturing PMI also eased, falling to a weaker-than-expected 54.5 in May from 56.4 in April. The sector continued to grow but at the slowest pace since China lifted pandemic restrictions in December. Separately, the private Caixin/S&P Global survey of manufacturing activity unexpectedly rose to 50.9 in May from April’s 49.5 as output and new orders rose at the highest level in almost a yearIndustrial profits fell 20.6% in the first four months of the year from the prior-year period, according to the National Bureau of Statistics, slightly narrower than the 21.4% decline recorded in the first quarter amid waning domestic and external demand Chinese equities rose after the U.S. Senate passed legislation to suspend the debt ceiling, removing the risk of a destabilizing U.S. default and reviving investors’ risk appetite. The Shanghai Stock Exchange Index gained 0.55%, while the blue-chip CSI 300 added 0.28% in local currency terms. In Hong Kong, the benchmark Hang Seng Index rose 1.1% after hitting a six-month low earlier in the week, according to Reuters. |
| Sources: T. Rowe Price, MFS Investments, Wells Fargo, Handelsbanken Capital Markets, M. Cassar Derjavets. |
