| USA NFP (Nonfarm payrolls) rose 206K in May, more than the median economist forecast calling for a +190K print. However, this positive surprise was more than offset by a 111K cumulative negative revision to the prior months’ results. Employment in the goods sector rose 19K as a 27K gain in the construction segment was only partially offset by an 8K decline for manufacturing. Month on month, earnings progressed a consensus-matching 0.3% following a +0.4% print the prior month. The Household Survey painted a slightly less upbeat picture of the situation prevailing in the labour market, with a reported 116K increase in employment. This small gain, combined with a one-tick increase in the participation rate (to 62.6%) and a 277K increase in the size of the labour force, resulted in an increase in the unemployment rate, from 4.0% to a 31-month high of 4.1%. Full-time employment retraced 28K, while the ranks of part-timers increased 50K. The Trade Deficit widened 0.8% from $74.5 billion (revised from $74.6 billion) in April to $75.1 billion in May, the largest it has been since October 2022. This was due to an increase in the goods trade deficit from $99.3 billion to $100.2 billion being only marginally offset by an increase in the services surplus from $24.8 billion to $25.1 billion. Goods imports contracted $2.0 billion to $269.7 billion on decreases in consumer goods ($2.0 billion) and automotive vehicles, parts, and engines ($0.6 billion). Contrarily, imports of industrial supplies and materials increased $1.4 billion. Goods exports decreased $2.9 billion to $169.6 billion on declines for industrial supplies and materials (-$2.1 billion) and automotive vehicles, parts and engines (-$0.5 billion). Service exports attained an all-time high pegging in at $92.1 billion. Service imports, too, struck a record high at $67.1 billion. Travel exports (spending by visitors in the United States) hit a peak of $18.1 billion, and imports (spending by Americans abroad) rose for the first time since February. The ISM Manufacturing PMI slid from 48.7 to 48.5 in June instead of shooting up to the consensus target of 49.1. The index stayed below the 50-point mark separating expansion from contraction for the 19th time in 20 months. The output gauge sank into contraction territory in the month, diving from 50.2 to 48.5. New orders contracted again albeit at a slower rate (up from 45.4 to 49.3). Weaker demand conditions were reflected in a further decline in work backlogs (from 42.4 to 41.7), which might explain why firms shrank payrolls in the month (from 51.1 to 49.3). Supply conditions improved again in June as signaled by the supplier deliveries sub-index (from 48.9 to 49.8), which held below the 50-point mark for a fourth straight month. The prices paid indicator signalled another monthly expansion despite falling from 57.0 to 52.1. The ISM Non-Manufacturing PMI fell from 53.8 in May to 48.8 in June, its lowest level since May 2020 and far below the median economist forecast of 52.7. The new orders sub-index (from 54.1 to 47.3) and the business activity sub-index (from 61.2 to 49.6) both signalled a sharp reversal. The employment tracker sank further into contraction territory (from 47.1 to 46.1). Prices paid increased again as signalled by the index (down from 58.1 to 56.3), which stayed above the 50-point mark for the 85th straight month. Of the 18 industries covered, eight reported growth in June. Results of the JOLTS (Job Openings and Labor Turnover Survey) showed that there were 8,140K positions to be filled in May, up 221K from the month before and just the fourth MoM increase since January 2023. The consensus forecast called for openings to jump to 7,946K. Notwithstanding this increase, openings are clearly still trending down. Fed Chair Jerome Powell said that after stalling in the early part of the year, prices appear to be resuming a disinflationary trend, noting that the US labor market is showing signs of cooling off, as hoped, and that the job market is moving toward better balance. The Fed chair said he sees inflation in the low-to-mid-2% range a year from now. He refused to be drawn into a political discussion, saying the Fed stays out of politics. Regarding fiscal policy, Powell indicated that debt sustainability needs to be a focus going forward and action needs to be taken sooner rather than later. The odds of a September rate cut crept up after Powell’s remarks. The big story of 2023 and 2024 has been one of an economy that has consistently surprised with its remarkable resilience. The S&P 500 Index continued to climb to record highs, although the market’s gains remained notably narrow. As measured by Russell 1000 indexes, growth shares outperformed value stocks by 415 basis points (4.15 percentage points), while the small- and mid-cap benchmarks recorded losses. The Nasdaq Composite ended the week 73.71% off its lows since the market began its rebound in mid- to late-2022. The Dow Jones Industrial Average had gained less than half of that amount, 32.79%. Markets were closed Thursday in observance of the Independence Day holiday, and lighter trading volumes were registered as the week progressed. UK In light of the new elections, the King’s speech will be on 17 July, and will set out, at a very high level, Keir Starmer’s priorities for the coming year. Economically, the big news is going to be the budget, which is likely to be in the early autumn. The new Chancellor will be looking to have the Office for Budget Responsibility give its approval of her figurers. (This is something that Liz Truss, who has now lost her seat, failed to do in September 2022). Labour has said that they are not looking to increase income tax, National Insurance or VAT (these three account for 65% of tax revenues), which leaves issues such as changing Capital Gains tax the subject of a good deal of speculation. The expectation has to be that Reeves will follow the pattern set out by Gordon Brown in 1997, sticking to the previous Government’s spending plans for the next couple of years before setting out more ambitious goals as time progresses. Financial market investors had fully expected a substantial Labour victory and so Sterling-euro remains range bound, awaiting the start of interest rate reductions. British house prices fell slightly in June but are likely to rise over the rest of this year and into 2025 with interest rates expected to start falling soon. Property prices fell by 0.2% last month from May and over the 12 months to June they rose by 1.6%. This continued stability in house prices (rising by just +0.4% so far this year) reflects a market that remains subdued, though overall activity has been recovering. For now it’s the shortage of available properties, rather than demand from buyers, that continues to underpin higher prices. The Labour Party has promised to speed up home-building by reforming the country’s planning system. House prices in London rose by 0.9% over the 12 months to June while Northern Ireland saw the fastest regional price growth, up 4.0% from a year earlier. Britain’s housing market boomed during the coronavirus pandemic but it slowed after the Bank of England pushed interest rates to their highest since 2008 last year. Investors see a 55% chance of the BoE cutting rates for the first time in more than four years on 1 August. EU Eurozone headline inflation eased marginally in line with expectations to 2.5% in June from 2.6% in May. After a year with a steep decline, inflation has moved sideways since the end of last year, on what we assume to be a bumpy last mile of disinflation towards the target. More importantly, core inflation disappointingly failed to ease and remained at 2.9% in June, following the surprising acceleration in May. Both service inflation and goods inflation was unchanged at 4.1% and 0.7% respectively. German headline inflation eased to 2.5% from 2.8% in May, with a national measure of core inflation (excluding food and energy) easing less from 3.0% to 2.9%. In France, headline inflation was 2.5% in June, down an inch from 2.6% in May. National figures suggest that the drop was due to energy and food prices, while core inflation remained broadly unchanged. Italy‘s headline inflation increased slightly but remained low at 0.9% in June, with core inflation marginally down to 2.1% from 2.2% in May. Spanish headline inflation dropped to 3.5% in June from 3.8% last month, while the national measure of core inflation remained unchanged at 3.0%. Speaking at the ECB (European Central Bank) annual retreat in Portugal, ECB President Christine Lagarde appeared to strike a slightly more hawkish tone. She said that Europe is still facing several uncertainties regarding future inflation, especially in terms of how the nexus of profits, wages and productivity will evolve and whether the economy will be hit by new supply-side shocks. And it will take time for us to gather sufficient data to be certain that the risks of above-target inflation have passed. Minutes from the ECB’s June meeting showed some members opposed the first rate cut since 2019 because wage growth had surprised to the upside and inflation seemed to be stickier. In local currency terms, the pan-European STOXX Europe 600 Index ended 1.01% higher. Major stock indexes also rose, with France’s CAC 40 Index climbing 2.62%, Germany’s DAX gaining 1.32%, and Italy’s FTSE MIB putting on 2.51%. CHINA The value of new home sales by the country’s top 100 developers fell 17% in June from the prior-year period, easing from a 34% decline in May, according to the China Real Estate Information Corp. The data boosted hopes that China’s housing market, now in its fourth year of a downturn, may start to gain traction after the government announced a sweeping rescue package in May. The private Caixin/S&P Global survey of manufacturing activity edged up to a better-than-forecast 51.8 in June from 51.7 in May, marking its eighth monthly expansion. However, the Caixin services PMI was 51.2 in June, missing economists’ forecasts and slowing from 54 in May. The mixed PMI readings reflected the uneven performance of China’s economy this year amid a yearslong property slump that has hit domestic consumption and rising trade tensions that threaten the manufacturing sector China’s manufacturing sector shrank in June for the second consecutive month, government data showed. The official Manufacturing Purchasing Managers’ Index (PMI) reached 49.5 in June, unchanged from May, as new orders and exports declined. The figure missed the 50-mark threshold separating growth from contraction. The Non-Manufacturing PMI, which measures construction and services activity, rose to a below-consensus 50.5, down from 51.1 in May. Chinese equities fell as underwhelming manufacturing data reinforced concerns about the slowing economy. The Shanghai Composite Index and the blue-chip CSI 300 both registered modest losses for the week. In Hong Kong, the benchmark Hang Seng Index gained 0.46% during a holiday-shortened week, according to FactSet. Markets in Hong Kong were closed Monday for the Special Administrative Region Establishment Day. |
| Sources: T. Rowe Price, Wells Fargo, Handelsbanken Capital Markets, TD Economics, National Bank of Canada, MFS Investments, Reuters, M. Cassar Derjavets. |
