USA
• Nonfarm payrolls rose 428K in April, more than the +380K print expected by consensus. This positive surprise was partly offset by a 39K downward revision of previous months’ results. Employment in the goods sector jumped 66K, with gains in manufacturing (+55K) mining/logging (+9K) and, to a lesser extent, construction (+2K). Services-producing industries, meanwhile, expanded payrolls by 340K, with notable increases for leisure/hospitality (+78K), education/health (+59K), transportation/warehousing (+52K), professional/business services (+41K), finance/insurance (+35K) and retail (+29K). Employment in the public sector advanced 22K. Average hourly earnings rose 5.5% YoY in April, the same as in March and in line with the median economist forecast. MoM, earnings progressed 0.3%
• Released at the same time, the household survey painted a decidedly less upbeat picture of the situation prevailing on the labour market, with a reported 353K drop in employment. This came on the heels of a 753K surge the prior month. The monthly drop, combined with a two-tick decline in the participation rate (from 62.4% to 62.2%), left the unemployment rate unchanged at a post-pandemic low of 3.6%. Full-time employment sank 651K, while the ranks of part-timers swelled 189K
• The two employment reports conveyed starkly different messages in April. While the establishment survey signaled a continuation of employment gains, the household poll reported losses. Such discrepancies between the two reports are not particularly uncommon. These are, after all, rather imprecise indicators whose methodology differs greatly. Looking at the data over a longer period, the two surveys appear much more in tune. In fact, the household survey points to stronger YTD employment gains (+2.73 million) than the establishment poll (+2.07 million). The same is true over the past 12 months (+7.40 million vs. +6.62 million). It therefore seems likely that the decline in employment reported by the household survey was more an adjustment after an overshoot than a sign of weakness in the labor market
• The Job Openings and Labor Turnover Survey (JOLTS) showed that positions waiting to be filled rose in March from 11,344K to an all-time high of 11,549K. As a result, the ratio of job offers to unemployed person continued to rise, going from 1.81 to an all-time high of 1.94. The report also showed that hires declined from 6,832K to 6,737K, a level still 11.8% above this indicator’s pre-pandemic peak. Total separations, for their part, rose from 6,082K to 6,321K as quits increased from 4,384K, to 4,536K. The quit rate (i.e., the number of voluntary separations as a percentage of total employment) ticked up to 3.0%, equaling the peak it reached last year. The large number of quits is encouraging in that it may reflect growing confidence among employees and stiffer competition among employers
• In March, the trade deficit increased to an all-time high of $109.8 billion. Goods imports surged 12.0% to a new record of $298.8 billion, led by finished metal shapes (+$6.8 billion), passenger cars (+$2.5 billion), other textile and household goods (+$2.0 billion), and computers (+$1.5 billion). Petroleum imports increased $1.6 billion to $24.8 billion as crude oil imports rose $1.2 billion. Goods exports rose 7.3% to $170.7 billion thanks essentially to an increase in other petroleum products (+$2.0 billion), crude oil (+$1.7 billion), fuel oil (+$1.3 billion), and natural gas liquids (+$1.1 billion). As imports expanded at a higher rate than exports did, the goods trade deficit increased from $107.8 billion to a historical level of $128.1 billion. On a country-by-country basis, the U.S. goods deficit increased with Canada (from $6.6 billion to an all-time high of $10.3 billion), China (from $41.2 billion to $48.6 billion), Japan (from $5.1 billion to $6.1 billion), and Mexico (from $9.8 billion to $10.6 billion), but improved with the European Union (from $17.0 billion to $15.6 billion). The services surplus, meanwhile, improved from $18.0 billion to $18.3 billion as growth in exports slightly outpaced growth in imports (1.8% vs. 1.7%). Travel exports (spending by visitors to the United States) rose for a second month in a row after decreasing in January following the imposition of various measures to slow the progression of the Omicron variant. Travel imports (spending by Americans abroad), too, climbed to their highest level since the start of the pandemic
• The ISM Non-Manufacturing PMI declined for the fourth time in five months, going from 58.3 to 57.1, which was still above the indicator’s pre-pandemic level and consistent with a decent pace of growth in the services economy. Consensus expectations, however, were for the index to rise to 58.5. The new orders sub-index decreased significantly from 60.1 to 54.6. The employment sub-index decreased as well, sinking into negative territory (from 54.0 to 49.5). On the other hand, the sub-indices tracking business activity (from 55.5 to 59.1), supplier deliveries (from 63.4 to 65.1), inventory sentiment (from 40.2 to 46.7), and inventory change (from 51.7 to 52.3) increased, signaling an acceleration of growth. The report also indicated that inflationary pressures continued to mount among service providers. The Prices Paid Index climbed from 83.8 to an all-time high of 84.6. The new export orders sub-index decreased from 61.0 to 58.1 indicating less robust growth. Meanwhile, the imports sub-index moved into positive territory (from 45.0 to 52.9). Of the 18 industries covered, 17 reported growth in April
• The ISM Manufacturing PMI fell from 57.1 in March to 55.4 in April instead of rising to 57.6 as per consensus. This was below this indicator’s pre-pandemic level but still consistent with a decent pace of expansion in the goods economy. The new orders (from 53.8 to 53.5) and output sub-indices (from 54.5 to 53.6) signaled a moderation in growth, with both gauges dropping to their lowest level since the onset of the pandemic. Supplier delivery times, for their part, increased at a faster pace than in the prior month (from 65.4 to 67.2) on account of persistent supply constraints made worse by restrictive Covid-19 measures in China. The employment gauge fell to a seven-month low (from 56.3 to 50.9), suggesting a slower pace of hiring in April. Price increases moderated but continued to be significant, as the price paid sub-index decreased from 87.1 to 84.6
• As widely anticipated, the US Federal Reserve hiked its federal funds target rate 50 basis points to between 0.75% and 1% on Wednesday, the first half-point hike since 2000. It was also the first time in two decades that the Fed hiked rates at consecutive meetings. Markets took temporary comfort in the news that policymakers are not actively considering larger hikes in an effort to bring rates quickly toward neutral. However, Fed Chair Jerome Powell took the unusual step of suggesting that the FOMC will hike rates an additional 50 basis points at both the June and July meetings. Powell was unexpectedly optimistic regarding the prospects for an economic soft landing, and less insistent than some expected regarding the necessity of raising rates above neutral, a level he put at between 2% and 3%. In addition to raising rates, the Fed detailed its plan to begin reducing its balance sheet on 1 June by an initial $47.5 billion per month ($30 billion Treasuries/$17.5 billion mortgage-backed securities) for three months with a $95-billion-per-month cap ($60 billion Treasuries/$35 billion MBS) taking effect in September. The Fed Chair speculated that the reduction in the balance sheet would roughly translate into about 0.25% of tightening over the next year
• US productivity, which measures output per hour worked, declined 7.5% in the first quarter from the fourth quarter of 2021. That’s the biggest fall since 1947. The productivity drop pushed unit labor costs up 11.6% from the previous quarter while hourly compensation rose 3.2%. Always a volatile data series, productivity swings have been even choppier than normal since the onset of the pandemic
• Most of the major benchmarks endured a fifth consecutive week of losses as interest rate and inflation worries continued to weigh on sentiment, especially toward growth stocks. The losses briefly pushed the Dow Jones Industrial Average into correction territory, down more than 10% from its recent highs, where it joined the S&P 500 and S&P MidCap 400 indexes. The Nasdaq Composite and the small-cap Russell 2000 Index ended the week firmly in bear markets, down more than 25%. Markets were especially volatile late in the week, although the Cboe Volatility Index (VIX) remained slightly below the intraday levels briefly reached in late January
• In terms of data release, the NFIB Small Business Index is out on Tuesday. Small business confidence has slipped recently amid supply chain disruptions, labor shortages and Russia’s invasion of Ukraine. March’s 93.2 reading was the worst since April 2020 and was in line with the 2010-2015 average and the aftermath of the 2008-2009 downturn. Like many economic surveys, the overarching themes of inflation and the tight labor market have been standouts, and likely persisted in April. Hard-to-fill positions have come down since peaking last fall but remain historically high with 47% of firms reporting hiring troubles in March. To attract talent, 49% of firms reported raising compensation and another 28% reported plans to raise compensation, both up from February. As firms relay these costs to consumers, the share of businesses raising prices also increased to 72%, a new series high, while those planning to raise prices over the next three months also increased
• CPI is out on Wednesday. The consumer price index will be the hot topic of next week as there will be an opportunity to verify if price growth has finally started to roll over after surging 1.2% in March and 8.5% over the year. In April, CPI is expected to have risen 0.4% MoM, which would lead the YoY rate to drop to 8.3%, the first decline since July 2021. Energy prices were to blame for around 70% of March’s hefty increase and Russia’s invasion of Ukraine sent food prices higher over the month. But April’s likely moderation can also be tied to longer-term transitions. Goods inflation has started to let up as consumers transition toward services. Core goods inflation fell by the most since April 2020 in March due to some reprieve in auto prices, while core services inflation continued to gather steam. Some services prices may continue to be pushed higher by pent-up demand, such as that for airfare and lodging, but there is likely less room for catch-up in the fall as real incomes have lessened businesses’ ability to pass along costs
UK
• The data for money and credit suggests that the housing market remains in relatively good health: mortgage approvals registered at 70.7k – roughly equivalent to February’s figure and meeting market expectations – and mortgage lending came in at £6.97bn (consensus £5.1bn), up from just £4.67bn in the previous month. Individuals borrowed an additional £1.3bn, on net, in consumer credit in March, which is higher than the 12-month pre-pandemic average. Household deposits with banks and building societies increased by £4.6bn in March and non-financial businesses deposited £12.4bn, on net. The relatively robust figures relating to both the housing market and consumer spending are difficult to square with consumer confidence, which according to the GfK measure has been on the slide for many months and most recent figures show readings that have never been worse during the pandemic period. Moreover, this has of course been backed up by retail sales figures which have fallen in two consecutive months. A slowdown is likely in the housing market during the rest of 2022 – driven by increased rates for new mortgages and broader cost of living pressures – and for businesses and individuals to be cautious on spending decisions. It is estimated that households have accumulated nearly £200bn in excess savings over and above the pre-pandemic trend, but there is little evidence in the latest figures that suggest consumers – or businesses for that matter – have been deploying these savings into the economy. It remains likely that UK GDP q-o-q will see a negative reading for Q2 2022 and slow QoQ growth thereafter in 2022
• As expected the Bank of England has raised interest the rate by 25bp to 1%, the fourth consecutive rate rise, the first time this has happened since 1997. While financial markets are anticipating a more aggressive tightening taking UK interest rates above 2% by year end, closer to that signaled by the US Fed in its decision yesterday, there are reasons to emain dovish. While inflation remains a huge and justifiable concern, UK inflation is now 7.0%, the energy component of UK inflation (like that in the EZ and in contrast to the US) is significant. The base effect alone will begin to see inflation steady in 2023, and if energy prices were to fall (a big if) the impact on inflation would be considerable. Secondly, the UK economy is likely to slow markedly in the coming months, as both the cost of living squeeze, as well as a delay in business investment, mean that growth is negative in Q2 and shows very little growth for the rest of the year. The Bank of England itself now forecasting the economy to shrink in 2023, the difference seems to be one of timing as opposed to different reading of the current circumstances
EU
• More European Central Bank (ECB) policymakers appeared to press for an early increase in interest rates after the end of the quantitative easing program sometime in the third quarter. Executive Board member Isabel Schnabel, Bank of France Governor Francois Villeroy de Galhau, Bank of Finland Governor Olli Rehn, and Bank of Austria Governor Robert Holzmann hinted that they would vote for a rate hike as early as July
• Shares in Europe tumbled amid fears that central banks may have to step up their efforts to control inflation, potentially increasing the risk to economic growth. Lockdowns in China to curb the spread of the coronavirus and the Ukraine conflict added to the uncertainty. In local currency terms, the pan-European STOXX Europe 600 Index ended 4.55% lower, while France’s CAC 40 Index dropped 4.22%, Germany’s DAX Index fell 3.00%, and Italy’s FTSE MIB Index lost 3.20%
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CHINA
• China’s service sector activity shrank in April at the second-steepest rate on record, according to the latest Caixin services Purchasing Managers’ Index (PMI). The drop in the private Caixin survey was consistent with the official PMI, which fell for the second straight month in April as lockdowns curbed production and disrupted supply chains
• Tensions with the U.S. remained elevated as the U.S. Securities and Exchange Commission (SEC) added over 80 U.S.-listed Chinese companies to its list of entities facing possible delisting from U.S. exchanges. The SEC’s growing list of Chinese companies facing expulsion stems from a long-standing dispute with China over auditing standards, which could see dual-listed Chinese companies removed as early as 2024 if they fail to comply with U.S. auditing rules
• In another sign of growing tensions with the West, China has ordered central government agencies and state-backed companies to replace foreign-branded personal computers with domestic alternatives in two years, Bloomberg reported. The overhaul marks one of Beijing’s most aggressive moves to date to reduce the country’s reliance on U.S. technology
• Chinese markets fell as Beijing showed no sign of relaxing its zero-tolerance approach to the coronavirus, raising worries about the economic cost of widespread lockdowns. The broad, capitalization-weighted Shanghai Composite Index fell 1.5%, and the blue chip CSI 300 Index, which tracks the largest listed companies in Shanghai and Shenzhen, sank 2.7%
Sources: T. Rowe Price, MFS Investment Management, National Bank of Canada, Wells Fargo, M. Cassar Derjavets