United States
Productivity in Q1 was down .6% q/o/q annualized but off a higher base as Q4 was revised up. Stripping out this noise saw productivity up by 1.1% y/o/y for a 2nd straight quarter. The 4 quarter run rate is only up .5%. Also of note was the 2.8% rise in unit labor costs y/o/y and is around in line with the 4 quarter average of 2.7%. Also worth noting was the 3.9% y/o/y increase in Compensation Per Hour which matches the quickest pace since December 2012.
Bottom line, the rebound in productivity over the past 2 quarters (looking y/o/y) comes after a pretty soft stretch. That said, I don’t think there is any reason right now for any meaningful pickup until we see a greater level of capital investment. I’m not going to get into the possibility of mismeasurements (if that’s a word) in productivity due to technology right now because there are also plenty of reasons for the low level.
Initial jobless claims totaled 238k, 10k less than expected and comes after a jump to 257k last week. As a similar print of 235k dropped out of the calculation, the 4 week average held at 243k vs 242k last week. Continuing claims, delayed by a week, fell by 23k to the lowest level since 2000. The bottom line stays the bottom line in that the modest pace of firing’s is due to employer optimism for a resumption of quicker growth generated by tax reform and regulatory relief at the same time it’s gotten really tough to find good, qualified employees.
The March trade deficit totaled $43.7b, $800b narrower than expected and little changed with $43.8b in February. Both exports and imports were lower with the former the weakest since November which is somewhat surprising considering the better overseas economic data we’ve seen. The exports of goods was down by 1.6% m/o/m and only partially offset by a rise in service exports. Imports also totaled the smallest amount since November even as petro imports jumped. Import weakness was widespread in goods and only rose for auto’s.
Bottom line, the trade deficit narrowed for the wrong reasons with declines in both components but Q1 GDP might be revised up slightly as a result.
One thing on the US dollar, the Fed was somewhat hawkish yesterday in basically telling us Q2 growth will improve and they will likely hike in June. So we will probably get a 4th hike and the dollar index is sitting below 100, where it was more than 2 years ago and well before the first Fed rate hike. This is even as real rates out to 5 years is back in positive territory this week. I remain cautious on the dollar and bullish on gold. The loud bullish dollar case has been all about policy divergence and that theme just hasn’t played out.
Asia
For the 3rd day we’re going to talk about China which just so happens to be the 2nd biggest economy. The Caixin April PMI services index fell .7 pts to 51.5 which is the weakest since May 2016 and combined with its manufacturing index out a few days ago brings the composite index to the lowest since June of last year. Within the services report, new orders did pick up but employment was the weakest this year and backlogs fell. Input costs fell to a 6 month low but prices received “marked one of the fastest rates of charge inflation seen across the service sector for 3 ½ years.” The overall business outlook also fell to a 5 month low.
This was Caixin’s bottom line, “A turning point in growth appeared to have emerged at the beginning of the second quarter. Investors should be cautious about downward risks in the economy.” In response the Shanghai comp fell another .25% and is now essentially flat year to date and at the lowest level since the day DJT was inaugurated. The H share index closed down by .8% and Copper is down for a 3rd straight day and at the weakest level in 4 months. Nickel is at a 10 month low and iron ore and steel prices plunged by 5%. The Chinese 10 yr yield rose another 5 bps to 3.58% and has broken out to a near 2 year high. I’ll say again, if you haven’t been paying attention to China in a while, you better start doing so again. The credit deleveraging, while desperately needed, could be enormous and hugely disruptive for itself and global growth.
The other country that happens to have more than 1 billion people, that being India, saw its services PMI fall to 50.2 from 51.5 which is basically flat line. Markit said “The latest results indicate that the road to recovery from the notes ban is still bumpy and is a reminder that the sector is not out of the woods yet.” The economic story is so exciting to me still in the Modi run India and I remain bullish notwithstanding the hugely disruptive nature of the demonetization process which is done and has now positively facilitated a huge shift to mobile payments.
The Sensex was up .8% overnight and now up almost 14% year to date. It closed just 7 pts from a record high. The South Korean Kospi closed at a record high, finally exceeding its 2011 peak. Yes, it’s done basically nothing for 6 years but change is a coming there and I still like it. In Europe, the German DAX is finally at a record high as the French debate yesterday likely clinches the election for Emmanuel Macron. The CAC is higher by almost 1% but is still well below its 2007 top. We’re seeing a flight from safety in the bonds of German, France and the UK as a result of the Macron optimism.
Europe
The final read of the Eurozone manufacturing and composite index was 56.8, about the same as the original print of 56.7 as the services component was revised up a hair. A nice gain in services was seen in Italy (its composite index hit a near 10 yr high) and gains too in Spain and Germany while France’s services PMI moderated by 1 pt. While April in the US has started out in a mixed fashion, this European indicator says the opposite over there after a good Q1. Markit said “that risks are moving from the downside to a more balanced situation.” On the pricing front that Mario Draghi is so obsessed over, “price pressures remain elevated, and the survey’s price indices suggest that core inflation will trend higher in coming months.” I expect more tapering news in June. The euro is up slightly at $1.093.
We heard from our 2nd ECB member since last week’s meeting and Peter Praet is now stealing a word from Janet Yellen. “After a prolonged period of exceptional monetary policy accommodation, any change in our policy stance should be gradual.” The underline is mine. He did say “The cyclical recovery of the euro area economy is becoming increasingly solid and downside risks to the growth outlook have further diminished but downside risks still prevail.” As for the June meeting, he didn’t give any hints but said they will “be able to draw on a more expanded information set than is available today, organized around new projections and including an updated assessment of the distribution of risks surrounding the economic outlook.” He also said wage growth needs to be stronger and that there is “no convincing upward trend in underlying inflation.” Yes, we want more wage growth but its beyond me why they want higher inflation. If one follows the other, they are still no better off.
The UK
The UK services PMI was higher by .8 pt to 55.8 and that was 1.3 pts above the forecast and the best print of the year. New orders and employment led the way while prices charged rose to the fastest pace since July 2008. Consumers are certainly feeling that as seen in the recent retail sales data. Markit “noted weakness in sectors such as hotels, restaurants and other household facing businesses.” So we have a weak consumer challenged by inflation while industry is doing ok. Considering the BoE’s sole mission is price stability, I’d say they are not doing such a good job on this. They meet a week from now.
Peter is the Chief Market Analyst with The Lindsey Group. He is Co-CIO at Bookmark Advisors, a member of the Advisory Services Network and a regular CNBC Contributor.