US
- May’s NFP (nonfarm payroll) report showed that 138,000 jobs were added for the month, while the unemployment rate remained low at 4.3%. Among the industries adding the most jobs for the month were, professional services, education and health, and leisure and hospitality. The unemployment rate dipped to 4.3% as the labor force participation rate fell to 62.7%, nearly unchanged from the 62.6% reading one year ago. Average hourly earnings rose 0.2%, resulting in a 2.5% gain on a year-over-year basis.
- Nominal personal income rose 0.4%, while nominal spending rose 0.4% in April. In assessing the purchasing power of consumers, it is important to focus on real disposable income, which controls for inflation and taxes, and which rose 0.2%. Real consumer spending in April rose 0.2%, taking the three-month moving average to 1.1% compared to just 0.6% in March. Consumer confidence dipped slightly in May, but, on trend, continues to edge higher. The continued improvement in income, employment and to a lesser extent consumer confidence suggests that there is more momentum behind consumer spending in the second quarter.
- The ISM’s manufacturing survey indicated that sentiment remained positive within the sector but with little change in the index in May. The new orders component and employment component were up on the month. The manufacturing sector is still expected to improve this year as somewhat stronger global demand and an expected increase in domestic business investment should help to support greater manufacturing growth.
- The trade deficit widened in April to $47.6 billion from March’s $45.3 billion deficit. Exports fell 0.3% while imports rose 0.8% for the month. It is likely the wider trade deficit will subtract from overall GDP growth in the second quarter as domestic demand will continue to boost import growth, while only modest global demand will slow the pace of export growth.
- US president Donald Trump announced that the United States would pull out of the Paris climate deal. The agreement put the US at a disadvantage, Trump said, highlighting its lack of enforcement mechanisms. Trump offered to renegotiate the deal, though Germany, France and Italy balked at the notion.
- Final figures for PMI services for May will be released on Monday. Services PMI increased to 54.0 in May according to the preliminary numbers whereas core capital goods orders were flat in April. This matches the consensus view that progress is still being made in the services sector, but the manufacturing sector may be taking a breather for now.
- San Francisco President John Williams said that unwinding the balance sheet may start as soon as later this year and will probably be “much smaller” than it is today in five years. Trailing Williams’ comments, Fed Governor Jerome Powell said the size of reduction would likely not exceed $2 trillion (of the $4.5 trillion) over the next five years. Markets now priced in 88% probability of an interest rate hike in June’s FOMC meeting as strong labor market and confidence in achieving price stability pave the grounds for higher interest rates.
- Finally, Monday also brings ISM non-manufacturing for May (first release). ISM non-manufacturing has reached very high levels recently and may have run a bit ahead of itself.
China
- China releases FX reserves, trade data and inflation next week. FX reserves are likely to increase due to valuation as the USD weakened significantly in May and thus increased the USD value of euro reserves for example. Trade data is generally very volatile and often distorted. It is likely import growth is peaking currently as import prices are lower and the growth in volumes is set to take a hit from slowing domestic demand. The underlying export growth is also likely to be gradually lower as signalled by a decline in the PMI export order index in recent months. CPI inflation is expected to rise only moderately to 1.4% year-on-year in May from 1.2% year-on-year in April. There is no big inflation pressure in China. Producer price inflation (PPI) is expected to come down fast this year as commodity prices have weakened.
- According to a statement by the China Foreign Exchange Trade System (CFETS), the trading platform controlled by China’s central bank PBoC (People’s Bank of China), the PBoC is making further changes to its method of calculating the fixing rate. A “countercyclical adjustment factor” is to be added to the previous fixing mechanism. This is the second revision of the yuan fixing mechanism this year. The PBoC only adjusted the fixing mechanism on 20 February. The fixing rate is supposed to correspond to the USD-CNY closing rate at 4:30 pm local time plus the change in the CNY exchange rate index. Consequently, the USD-CNY fixing was easy to forecast.
EU
- The ECB policy meeting on June 8 should be one of the more interesting meetings, as there is a widespread expectation that the ECB will use the opportunity to change its rhetoric in a ‘less soft’ direction. This is supported by signs that the recovery continues at a slightly more robust pace, as economic barometers were still healthy in May, leading to a more sustained impression of recovery. Also, political uncertainty has subsided (French election). However, despite the steady decline in unemployment, there is still uncertainty about whether underlying inflation is on a convincing upward trend, as recent months have fluctuated due to Easter. Changes to the ECB’s updated growth estimates are not expected, but there may be a chance for a slight downward revision to its headline inflation estimate for this year after the larger than expected recent decline.
- Italy’s major parties have agreed on a new electoral law, making early elections likely already this autumn. Investors are becoming increasingly nervous, of course. The Italian economy is treading water. Due to high unemployment and a lack of prospects voters increasingly sympathise with euro-sceptics who may gain a majority by the next general elections. The euro-sceptics’ goal is to turn the euro zone into a transfer union. At the same time, Italexit remains a real risk.
- The Sentix investor confidence figure is due for release on Monday. Sentix has climbed to levels not seen since 2007 with a figure of 27.4 in May. It is expected to rise further to 28.1. Last week, the euro area PMIs remain broadly unchanged at a high level, while IFO expectations saw an increase to a 3-year high which points towards a further increase in Sentix despite its already historically high levels.
- On Tuesday, euro area retail sales for April are due for release. There have been three consecutive months with monthly increases in retail sales with the latest figure in March up 0.3% month-on-month. Consumer confidence rose in April and Easter is likely to have supported higher retail sales. Another increase is expected in the range of 0.3%.
- The June ECB meeting will be held on Thursday. One of the main themes for observers is the forward guidance. While a more hawkish tone in the post-meeting statement is possible, a change in the forward guidance is unlikely. Some market participants expect the ‘or lower levels’ phrasing to be removed from the forward guidance on the policy rates.
UK
- The UK Manufacturing PMI eased in May to 56.7 from 57.3 in April. Consensus expected a slightly larger drop to 56.5. Despite the downward correction in May, the sentiment indicator remains elevated after reaching a three-year high in April. Sentiment in May was burdened by a contraction in the output index, and the new orders index retreated somewhat as well; nevertheless, both indicators remained above their historical averages. The pullback in order growth was mostly due to export orders, as domestic demand remained quite strong. According to the survey, sector data pointed to solid expansion of production and new orders across the consumer, intermediate and investment goods categories.
- Output growth was led by the intermediate goods sector, where the rate of increase accelerated to a four-month high. Growth moderated in the other two industries. Despite the slight downward correction to sentiment in May, optimism regarding the outlook for production in one year’s time improved to a 20-month high. Employment rose for the tenth consecutive month in May. Cost pressures remained high in May, despite easing further from recent highs. Increased costs reflected the historically weak sterling exchange rate and rising raw material prices. According to the survey, a number of manufacturers noted that they maintained sufficient pricing power to pass on higher costs to clients. Based on past form, the Manufacturing PMI suggests output could pick up somewhat in Q2.
- The single most important event next week is the UK general election taking place on Thursday 8 June. The election has suddenly become much more exciting, as polls indicate that the Conservatives’ lead over Labour has narrowed significantly over the past couple of weeks. At the beginning of the election campaign it seemed that PM Theresa May would win by a landslide, as she was 15 to 20 percentage points ahead in the polls. Although the polls might have exaggerated how far ahead she was, it is surprising that some of the polls have narrowed as much as they have. There seem to be two reasons why the gap has narrowed in the polls. Firstly, the focus has been more on domestic policy and not on Brexit as expected. Secondly, the Conservatives included some unpopular policies in their manifesto.
- In terms of economic data releases, the PMI services index for May will be released next week. Given that both Lloyds Business Barometer and the services confidence indicator fell in May, the PMI services index has likely to have fallen to 54.3 from 55.8 although both indicators suggest it could have declined even further.
Sources: Wells Fargo, MFS Investment Management, Handelsbanken, HongLeong Bank, Commerzbank, Danske Bank.
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