We enter the last two days of the week with really important US economic data with jobless claims, the ADP and payroll reports, the ISM manufacturing index and auto sales. We do so with the US Citi Surprise index sitting at just above the lowest level since February 2016 and here is an overlay of it vs the S&P 500 over the past two years. Notice any disconnect?
ADP said 253k private sector jobs were added in May, well more than the estimate of 180k and that is up from 174k in April (revised down by 3k). The service sector added 205k of the 253k and that is the most since November. Within this, trade/transportation/utilities, administrative/support services, professional/technical and education/health were the main drivers. Leisure/hospitality cut jobs for the first time in a year. The goods side contributed the balance with construction adding 37k of this, manufacturing 8k and commodity/mining contributing 3k. Mark Zandi referred to the months pace of hiring as “rip roaring” and “the current pace of job growth is nearly 3 times the rate necessary to absorb growth in the labor force. Increasingly, businesses’ number one challenge will be a shortage of labor.” Well we certainly saw plenty of signs of that shortage issue in yesterday’s Beige Book which means that the unemployment rate will likely continue lower. While this is great for employees, without faster productivity though, economic growth will continue to be mediocre and labor will continue to get a larger piece of the profit pie which is negative for corporate profit margins.
In response, the 2 yr yield is back to 1.30% and its spread to the 10 yr is wider by a half a basis point. That this spread is around the lowest level since late October is obviously sending a message of what it thinks about the economic impact of Fed rate hikes at this aged stage of the economic expansion.
2 yr yield (1 month)
Initial jobless claims rose 13k to 248k and that was 10k more than expected. That is also a 5 week high and brings the 4 week average to 238k from 236k which was the lowest level since the early 1970’s. Continuing claims, delayed by a week, rose by 9k after the prior week’s 25k increase. Bottom line, notwithstanding this week’s uptick, the pace of firings remain modest.
After a pretty violent rally yesterday, the offshore yuan is down slightly while the onshore yuan which didn’t rally as much as offshore yesterday, is up again. This rally is in the context of broad dollar weakness but also on the heels of last Friday’s news that ‘counter cyclical factors’ were now going to be considered when fixing the daily reference rate for the yuan. In other words, the PBOC said screw the shorts.
Data wise in China after the state sector weighted PMI’s seen yesterday that were basically in line, the private sector Caixin May manufacturing index is back in contraction territory as it fell .7 pts to 49.6 which is also below the estimate of 50.1. Caixin said “The fall in the headline index coincided with slower increases in output and new orders, while staff numbers were cut at a quicker rate. Subdued demand conditions underpinned a renewed fall in purchasing activity, albeit only slight, and the first increase in inventories of finished items in 2017 so far.” Confidence about the year ahead was unchanged at a 4 month low. So, not only did the Chinese economy show signs of slowing in April, that apparently is spilling over into May. The Shanghai comp was down almost .5% overnight but the Shenzhen index was much weaker with a 1.9% fall and is now down 10% year to date. The H share index was up a touch. Copper is down almost .5% almost giving back yesterday’s gain. Iron ore is down 1.8% after yesterday’s 2.5% drop and is trading at the lowest level since October. China’s economy has been in the far back area of people’s minds for a while but should not be ignored.
With some mixed messages seen so far in global trade in April and May, South Korea’s exports in May rose 13.4% y/o/y but that was slightly below the forecast of up 15%. It’s still a robust number but is off a very easy comparison last May when it printed down 6%. In 2015 into 2016, South Korea saw 21 of 22 months with export declines. Exports to Europe and Asia were higher but did fall to the US. Imports did beat expectations with an 18.2% y/o/y gain vs the estimate of up 15%. An area of weakness continues to be South Korean manufacturing where its PMI in May remained below 50 at 49.2 vs 49.4 in April. The Kospi was little changed overnight but remains up almost 16% year to date and remains one of my favorite stock markets due to valuation and potential chaebol restructurings.
Manufacturing PMI’s also fell m/o/m in India, Thailand, Malaysia, Taiwan, Vietnam and was slightly higher in Japan and the Philippines. Thus, a still mixed picture in the area of the world that is seeing the best growth.
The final look at the May Markit PMI manufacturing index for the Eurozone was left unchanged at 57 as expected and holding at the highest in about 6 years. The Employment component is the best in the 20 year survey history. Germany’s PMI is at a 73 month high while French manufacturing fell to a two month low. Spain’s touched a 4 month high while Italy fell to a 3 month low. All though are at good levels. On the important issue of inflation for the ECB, there was “a further increase in average input costs in May, continuing the trend towards a sellers’ market developing for many items. However, there are signs that price inflationary pressures were easing from recent highs, as highlighted by slower rates of increase in both input costs (6 month low) and output charges (4 month low). I have to ask this question to the ECB: What if inflation doesn’t get to 2% and sort of muddles along at its current pace, are you just going to keep on buying everything? As this confidence data is just a revision to an original print, markets don’t usually react in Europe. The euro is down a touch as are European sovereign bonds with most European stocks higher. Keep in mind, notwithstanding the big lifts in economic confidence in the Euro region, actual growth is still only expected to be about 1.5-2% this year.
The ECB meets next Thursday and while they most likely won’t announce specifics on the next taper, they will most likely stop saying that they will cut rates and enlarge QE again as possibilities based on their outlook. That’s not asking for much though as its ridiculous to keep on saying it. German Bundesbank President Weidmann late yesterday said “The current economic outlook, together with the improvement in the balance of risks, suggests that the ECB is beginning to discuss whether and when it will be time to adjust our forward guidance.”
The manufacturing PMI index in the UK fell .6 pts to 56.7 which is a hair above the estimate of 56.5. The employment component reached a 3 year high. Exports were up helped by the weak pound and new orders were up. With respect to the broad, weak pound led pricing pressures, “Rates of inflation in input costs and output charges remained elevated in May, despite easing further from recent highs. Increased costs reflected the historically weak sterling exchange rate and rising raw material prices. There were also signs of a sellers’ market developing for some inputs, due to supply shortages and an associated lengthening of vendor lead times. A number of manufacturers noted that they maintained sufficient pricing power to pass on higher costs to clients. Despite easing to a 5 month low, the increase in selling prices was still among the fastest seen in the survey history.” After the UK election next week, will Mark Carney and the BoE look to at least take away the emergency rate cut to .25% after Brexit? They definitely should as they’ve been completely wrong about their economic growth assumptions and inflation has clearly flared. The pound is lower as it now is getting bounced around on the recent polls. Gilt yields are little changed and the FTSE 100 is bid on the weak pound.