| USA Nonfarm payrolls rose 272K in May, a very sizeable beat versus the Bloomberg consensus projection of 180K. A slight offset to the stronger-than-expected print was a 10K downward revision to April’s reading with an additional 5K jobs were shaved from March’s data. Employment in goods-producing industries registered a 25K increase largely due to gains in the construction sector (+21K). However, the strong headline print was mostly attributable to the services side of the economy as employment here jumped by 204K. Private education and health services was the biggest gainer (+84K), followed by leisure and hospitality (+42K) and professional and technical services (+32K). While gains were relatively broad-based, the temporary help services category saw employment slide by 14K, the 25th decline in the last 26 months. Of the total jobs created, 229K were in the private sector, with 43K in the public sector. Average hourly earnings rose 4.1% YoY in May, an increase from an upwardly-revised 4.0% in April and two ticks above consensus expectations. Month on month, earnings progressed 0.4% following a softer 0.2% in April. Released at the same time, the household survey, painted an entirely different picture of the U.S. labour market. This more volatile report indicated that 408K jobs were lost in May. Combined with a 0.2% decline in the participation rate and a 250K drop in the size of the labour force, the unemployment rate rose one tick to 4.0%. Full-time employment cratered 625K (after an exceptional +949K print in April), while the ranks of part-timers rose 286K (after an outsized 914K positions were shed last month). A significant beat on headline job growth and steamier than expected wage growth sent two-year yields up by more than 12 basis points, with bets on the start of the Fed’s easing cycle pushed further out. Indeed, looking solely at the pace of non-farm employment (+1.8% YoY), it’s tough to make a case that the U.S. economy needs lower interest rates. That assessment is bolstered by the re-acceleration of average hourly earnings which will not soothe the FOMC from an inflation perspective The trade deficit widened in April from $68.6 billion to $74.6 billion essentially on account of goods, seeing how the services trade surplus was effectively unchanged at $24.7 billion (vs. $24.8 billion the month before). Goods imports increased $8.1 billion (to $271.9 billion), thanks in particular to automotive vehicles and parts (+$3.9 billion), capital goods (+$2.4 billion), and industrial supplies (+$1.3 billion). Goods exports, meanwhile, increased $2.2 billion (to $172.7 billion) on advances for capital goods (+$1.9 billion) and consumer goods (+$1.2 billion) despite a retreat for industrial supplies (-$1.1 billion) The ISM Manufacturing PMI moved down to 48.7 in May instead of up to the consensus target of 49.5, after declining from 50.3 in March to 49.2 in April. The index stood below the 50-point mark separating expansion from contraction for the 18th time in 19 months, with the short expansion break coming two months ago. Both the output gauge (from 51.3 to 50.2) and the new orders gauge (from 49.1 to 45.4) declined in May. Weaker demand conditions were reflected in work backlogs (from 45.4 to 42.4), but firms actually expanded payrolls in the month (from 48.6 to 51.1). Supply conditions improved again in May, with the supplier deliveries sub-index holding steady at 48.9, its third straight month below the 50 mark. The prices paid indicator slid from 60.9 to 57.0 but was still at a level that signals inflationary pressures. Of the 16 manufacturing industries surveyed, seven reported growth in May The ISM Non-Manufacturing PMI bounced back from a four-year low of 49.4 in April to 53.8 in May, overshooting by far the median economist forecast of 51.0. The new orders sub-index (from 52.2 to 54.1) and the business activity sub-index (from 50.9 to 61.2) signaled a sharp acceleration in growth, the latter even rising to a multi-month high. The employment tracker (from 45.9 to 47.1) improved as well but was consistent with still declining headcounts. Prices paid (from 59.2 to 58.1) fell in the month but remained at a level suggesting that price pressures persisted. Of the 18 industries covered, 13 reported growth in May The Job Openings and Labor Turnover Survey (JOLTS) showed that the number of positions waiting to be filled decreased from 8,355K in March (initially estimated at 8,488K) to 8,059K in April, below the consensus forecast calling for an 8,350K print. As the number of people looking for a job remained level, the ratio of job offers to unemployed persons decreased to 1.2, its lowest point since August 2021 but essentially in line with this indicator’s pre-pandemic level (≈1.20-1.25). Job openings decreased most in the categories of health care/social assistance (-204K), leisure/hospitality (-109K), and government (-72K). They increased in the categories of professional/business services (+122K) and private educational services (+50K). The quits rate (number of voluntary separations as a percentage of total employment) remained at 2.2%, one tick below its pre-pandemic level (in February 2020). Also, the quits rate in the private sector held steady at 2.4%, which is below its pre-pandemic level Construction spending dipped 0.1% in April, marking the indicator’s third consecutive monthly decline. The consensus forecast was for a gain of 0.2%. The drop reflected a decrease in the private sector (‑0.1%), where a 0.1% increase in private residential spending was more than offset by a 0.3% decrease in non-residential spending. Meanwhile, public-sector spending fell 0.2% Markets will now be waiting anxiously for the Federal Reserve’s decision next week. Although no change in policy is anticipated, the FOMC will publish updated forecasts in its Summary of Economic Projections (SEP). These will provide some guidance on the Fed’s expectations for interest rates. The prior SEP outlined expectations for 75 bps of cuts in 2024, but more recently market pricing has shifted closer to expecting roughly 50 bps after the persistence of inflation in the first quarter. Next week’s CPI report for May will provide some insight into the Fed’s progress on returning inflation to the 2% target, but it will likely be at least a few months before the Fed will possess the necessary confidence in the trajectory of inflation to reduce the policy rate The major indexes ended mixed for the week, as investors appeared to weigh contradictory data from the week’s busy economic calendar. The S&P 500 Index and technology-heavy Nasdaq Composite reached record intraday highs, but the smaller-cap indexes pulled back. Relatedly, growth stocks outpaced value shares by the widest amount since early in the year, as falling longer-term interest rates increased the notional value of future earnings In terms of data release, NFIB Small Business Optimism print is out on Tuesday. Given the heightened interest in inflation that is sure to set in next week, market participants may tune in for the release of May’s NFIB Small Business Optimism Index on Tuesday. Several of the underlying details presented in the index, such as the share of small firms expecting to raise prices, have proven to be useful signals for where underlying inflation pressures may be headed. From a small business perspective, inflation remains as a significant headwind. Despite the headline NFIB edging higher in April, continued low readings on the underlying components of the index suggest that small business confidence remains depressed by higher input pricing, ongoing shortages of skilled labor, tighter monetary policy and uncertain demand prospects CPI is out on Wednesday. Inflation will be back in the spotlight next week with the release of May’s CPI, and the report is likely to provide additional evidence that inflation is returning to a cooling trend after flaring up in Q1. Although food prices likely picked up slightly, lower oil prices should translate to a decline in energy prices during the month, helping yield a soft reading on the headline. Goods prices likely fell again, driven by declines in vehicle, apparel, recreation and household goods prices. Meanwhile, services prices look to have increased for a second straight month amid the slow moderation in shelter costs and other services inflation. UK British Prime Minister Rishi Sunak’s Conservative Party, facing an election next month, on Saturday announced details of its plan to tighten sickness benefit rules, which it said would eventually save 12 billion pounds ($15.3 billion) a year. Sunak, who has previously said he wants to change welfare rules to counter a rise in people dropping out of the workforce, said his reforms represented “a moral mission” as well as a way to help fix the public finances. The plan included an increase in mental health services, more stringent assessments of people’s ability to work and tougher rules for people who refuse to take up suitable jobs. The changes would save taxpayers 12 billion pounds a year in welfare spending by the end of the next parliament, which is due to run until 2029, the Conservatives said. However, the Institute for Fiscal Studies, an independent think tank, said many of the planned changes were already baked into existing fiscal projections. IFS Associate Director Tom Waters said the biggest new proposal was one aimed at reducing the number of people able to receive benefits on the basis of a mental health condition. “Cuts are certainly possible,” he said. “But history suggests that reductions in spending are often much harder to realise than is claimed.” Spending on welfare benefits for sick and disabled people has risen by 20 billion pounds annually since Britain’s last election in 2019 – before the COVID pandemic – to 69 billion pounds a year, and a further 10.6 billion-pound rise is expected by 2029, the IFS said British house prices edged down by 0.1% in May from April, representing a stabilisation of the market after a slowdown last year which was followed by a recovery on hopes of falling borrowing costs, data from mortgage lender Halifax showed. Analysts polled by Reuters had mostly expected an increase of 0.2% on the month. In the 12 months to May, prices rose by 1.5%, Halifax said on Friday, faster than the median forecast in the Reuters poll for an annual increase of 1.2%. “Market activity remained resilient throughout the spring months, supported by strong nominal wage growth and some evidence of an improvement in confidence about the economic outlook,” Halifax’s head of mortgages, Amanda Bryden, said. The stable picture for property prices over the last three months was likely to give more confidence to buyers and sellers, Bryden said. Last week, rival lender Nationwide said its measure of house prices rose in May after falling in the previous two months. Britain’s housing market has picked up speed after mortgage rates fell from 15-year highs last year on expectations that the Bank of England will start to cut its benchmark interest rates. Investors are currently putting a roughly 70% chance on the BoE lowering Bank Rate at its September meeting. EU As expected the ECB decided to cut policy rates by 25 basis points for the first time in almost five years. According to ECB based on an updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission, it was appropriate to cut policy rates after nine months of holding rates steady. While inflation has dampened in the Eurozone this year for the ECB to be confident enough to cut policy rates, the domestic price pressures still remain strong as wage growth is elevated, and inflation is likely to stay above target well into next year. According to the June macroeconomic projections, Eurosystem staff expect headline inflation to average 2.5 per cent in 2024, 2.2 percent in 2025 and 1.9 per cent in 2026. The March forecasts were 2.3 percent in 2024, 2.0 percent in 2025 and 1.9 percent in 2026. Inflation excluding energy and food is forecast to average 2.8 percent in 2024, 2.2 percent in 2025 and 2.0 percent in 2026, slightly higher than the March forecasts at 2.6 percent, 2.1 percent and 2.0 percent. The GDP growth forecast for 2024 was revised up to 0.9 percent from 0.6 percent in the March forecast. Thereafter, the economy to is expected to pick up and grow at 1.4 percent in 2025 and 1.6 percent in 2026 Lagarde indicated that the inflation data presented a mixed picture. Importantly, the ECB president highlighted that underlying inflation slowed again in April and that company profit margins were starting to absorb wage growth. She also said that the Governing Council’s confidence in the inflation forecast drove the ECB’s decision. Lagarde said that the road ahead will be bumpy, implying that policymakers will change with the data. There is potential for two additional rate cuts this year, most likely in September and December—although this purely data-dependent approach means that there might only be one France’s credit rating was downgraded late last week to AA- from AA by S&P Global Ratings, which cited concerns that the trajectory of government debt as a share of gross domestic product would increase through 2027 and not fall as previously forecast. As a result of the French downgrade, the rating on the European Financial Stability Facility was also downgraded to AA- In local currency terms, the pan-European STOXX Europe 600 Index ended 1.04% higher after the European Central Bank (ECB) on Thursday cut interest rates for the first time in five years. Major stock indexes recorded gains. Italy’s FTSE MIB rose 0.49%, Germany’s DAX tacked on 0.32%, and France’s CAC 40 Index added 0.11%. CHINA China’s exports rose a better-than-expected 7.6% in May from a year earlier, up from 1.5% growth in April. Imports increased a weaker-than-expected 1.8% in May, slowing from April’s 8.4% rise. The overall trade surplus increased to USD 82.62 billion, up from USD 72.35 billion in April. While strong overseas demand has driven China’s exports despite the threat of new tariffs, analysts noted that the disappointing imports growth indicated weak consumer spending at home The private Caixin/S&P Global survey of manufacturing activity edged up to 51.7 in May from April’s 51.4, marking its seventh monthly expansion. Readings above 50 indicate an expansion from the prior month. The Caixin services purchasing managers’ index reached an above-consensus 54 in May, rising from 52.5 in April. The private Caixin survey, which focuses on smaller and export-oriented firms, contrasted with official data the prior week showing that manufacturing activity unexpectedly contracted in May The value of new home sales by the country’s top 100 developers rose 11.5% in May, up from April’s 3.4% increase, according to the China Real Estate Information Corp. New home sales slumped 33.6% in May from a year ago but eased from April’s 45% decline. The data boosted hopes that China’s property market downturn, now in its fourth year, may start to recover after Beijing announced a rescue package in May to stabilize the struggling sector. However, some analysts remained skeptical about whether the measures will result in a sustainable housing recovery amid weak domestic demand Stocks in China retreated despite data showing that the property sector may be gaining traction. The Shanghai Composite Index declined 1.15%, while the blue-chip CSI 300 Index gave up 0.16%. In Hong Kong, the benchmark Hang Seng Index rose 1.59%, according to FactSet. |
| Sources: T. Rowe Price, Wells Fargo, Handelsbanken Capital Markets, TD Economics, National Bank of Canada, Reuters, M. Cassar Derjavets. |
