With the German 10 yr yield sitting at .41% and with yields negative out 7 years, the May German IFO business confidence index reached a record high at 114.6 vs 113 in April and above the estimate of 113.1. Both the Current Assessment and Expectation components were higher m/o/m helped by the Macron victory in France. This survey dates back to 1991. The IFO said simply, “Economic activity in Germany remains very brisk.” Ex Bundesbank President Axel Weber this morning said it well that “ECB policy looks increasingly out of place.” With 60b of freshly printed euros each month being used to buy more assets and banks penalized 40 bps for their deposits, I tend to agree. The ECB meets next on June 8th. The euro is little changed in response but at an 8 month high. The German 10 yr yield is up 1 bp to .41%. Where do we think that yield will be as the ECB further tapers and eventually gets out of negative interest rates? I’d say higher.
The French business confidence index in May only got a 1 pt lift from the Macron win to 105 as expected. While it matches the best level since 2011, it peaked at 115 pre recession.
Also out in Europe, the Markit PMI data was released. The manufacturing and services composite index for the eurozone was unchanged at 56.8 pretty much as expected as it holds at its multi year high. Germany and France both saw higher prints but “eased across the rest of the single currency area but remained close to a 10 yr high.” Markit said “Capacity is being strained by the strength of demand, with backlogs of work showing one of the largest increases in the past six years. Job creation has surged to the 2nd highest rate in nearly a decade as firms seek to expand capacity and meet rising demand. Although selling prices have continued to march higher, there are signs of input cost pressures beginning to ease.” The European economy remains a global bright spot as 2% type growth is considered robust there.
After the March/April distortion of the timing of the Easter holiday y/o/y, the May retail sales in the UK are back to being poor. The CBI retail index fell to 2 from 38 and below the estimate of 10. It’s the weakest since a negative print in January. Anything around zero is considered flat sales. Also of note, “y/o/y internet sales growth also slowed and fell below the long run average.” We all know the reason, shrinking real wages. CBI said that “the survey also revealed that average selling prices rose at the fastest pace in six years in the year to May.” Bottom line, the BoE continues to face this growth vs inflation conundrum. The 1970’s is a teaching lesson on what should be the main focus as control of the latter is the precursor to the former.
The only PMI out of Asia was in Japan and its manufacturing index for May fell to 52 from 52.7. It’s the lowest since November. Markit said “May’s PMI data signaled a broad based slowdown in growth of the manufacturing sector, with output, new orders and employment all rising at their slowest rates since last November.” They said there was “excess warehouse inventories” and also cited “recent sharp rises in raw material costs” as undermining the expansion in May. Bottom line, Japan’s economy is like that sports team that can just can’t sustain any notable winning streak. Just when they are the cusp of something sustainable there is another setback.
In the US, Fed Governor Lael Brainard spoke last night and still is in search of the perfect world. Notwithstanding 17 months in a row of core CPI inflation that was 2% or greater before the 1.9% print in April, she said “we really aren’t seeing much progress on core inflation.” Really? It of course all depends on what inflation stat they look at. The Fed prefers the PCE which has been suppressed by government price controls of its healthcare payments whereas CPI measures actual out of pocket consumer expenses. Also, the PCE has a smaller housing component than CPI even though housing is our largest living expense whether someone pays rent or property taxes. On the labor market, she said “For me I think there’s still a question mark around are we there yet” in terms of full employment. She’s splitting hairs at this point and there is no skating to where the puck is going here with the fed funds rate only at .875%. But that we know is soon to be going up again.
Today we’ll see a glance at US manufacturing and services from Markit for May and the April new home sales data.