Positives
1) The May ISM services PMI surprised to the upside, rising 1.4 pts to 56.9 from April. The estimate was a slight drop to 55.4 and the print is about spot on with the year to date average of 57. The components though were more mixed. Of the 18 industries surveyed, 16 saw growth vs 15 in April, 16 in March and 18 in February. Of those seeing an increase in new orders though, just 11 industries are expressing that vs 15 in April. With backlogs, 7 industries saw growth vs 10 in the month prior. With employment, 12 reported an increase vs 10 in April. The ISM summed everything up by saying “The non manufacturing sector continues to experience a slight uptick in business activity, but it is still leveling off overall. Respondents are mostly optimistic about overall business conditions, but concerns remain about tariffs and employment resources.”
2) Refi applications grew by 6.4% w/o/w and 33% y/o/y.
3) Vehicle sales in May totaled 17.3mm at a SAAR, above the estimate of 16.9mm but it was all due to a rise in fleet sales as retail sales fell.
4) The Eurozone May services PMI was revised up to 52.9 from 52.5 and that’s up .1 pt from the April print. Markit said “Solid growth occurred in spite of a slowdown in the rate of new business expansion to a 3 month low.” Also of note and music to the ECB’s ears, “Demand for staff led to further upward pressure on wages, and this was a key component behind a sharp increase in overall service sector costs.” All of this though was not able to be passed on due to “competitive pressures.” Bottom line, notwithstanding the slight uptick in services, Markit said “growth remains only modest, in part reflecting a spill over from the trade led downturn in the manufacturing sector.”
5) Helping to raise REAL wages, inflation in the Eurozone remained benign. The Eurozone May CPI rose 1.2% y/o/y, one tenth less than expected and a downshift from 1.7% last month. The core rate slowed to a rise of .8% from 1.3% in April and that was also one tenth less than expected.
6) In Germany, April factory orders rose .3% m/o/m which was better than the estimate of no change and March was revised up by 2 tenths. Orders within the Eurozone was the most weak, falling 5.8% but was offset by a 5.7% increase outside the region. Orders fell domestically.
7) The UK services PMI in May rose to 51 from 50.4 and that was .5 pt above the estimate. “Survey respondents commented on greater intakes of new work and a slight improvement in underlying business conditions since the start of spring. However, there were again widespread reports that Brexit uncertainty had held back client demand and remained a headwind to growth.”
8) French industrial production in April rose .4% m/o/m, one tenth more than expected but offset by a two tenths downward revision to March to -1.1%.
9) The Reserve Bank of India cut rates by 25 bps to 5.75%. The moderation in inflation has certainly given them room to move and they have rates to cut.
10) India’s May manufacturing PMI rose to 52.7 from 51.8.
Negatives
1) May non farm payrolls rose just 75k, 100k less than expected and there were a net downward revision of 75k in the two prior months. Still well below the forecasts but the private sector put in a slightly better performance than the headline as it added 90k. After two months of job losses, the household survey said 113k jobs were added which combined with a similar sized increase in the labor market saw the unemployment rate stay the same at 3.6%. The U6 though did fall by 2 tenths to 7.1% and that is the least since November 2000. Both the participation rate and the employment to population ratio were unchanged from April. The workweek was also unchanged at 34.4 but the estimate was for an increase to 34.5. Hourly wage growth was one tenth less than expected, rising 3.1% y/o/y, the slowest pace since September. Average weekly wage growth slowed to 2.8% y/o/y disappointingly and another reason why the Fed should not be shooting for higher inflation. Smoothing it out puts the 3 month average job gain at 151k vs the 6 month average of 175k and the 12 month average of 196k, an obvious moderation. Bottom line, employers are doing what should be expected of them in light of the current economic circumstances where visibility is more limited, they are calling a time out.
2) So now the US government is going after our most successful companies for being too successful.
3) The Markit measure of US services fell to the lowest since 2016 at just above 50 at 50.9 which “signaled only a marginal expansion in business activity across the US service sector in May.” They also said the “trade led slowdown continued to widen from manufacturing to services” as “Inflows of new business showed the 2nd smallest rise seen this side of the global financial crisis as the steepest fall in demand for manufactured goods since 2009 was accompanied by a further marked slowdown in orders for services.” With respect to Employment, which was a bright spot according to ISM, Markit said “Employment growth has come off the boil in line with weaker than expected sales and gloomier prospects for the year ahead, albeit still showing some resilience.”
4) Markit revised its manufacturing index down by .1 pt to 50.5 from 52.6 in April and that is the lowest since September 2009. New orders are at the weakest since August 2009. They said “With future optimism sliding sharply lower in May, risks to near term growth have shifted further to the downside. While companies of all sizes are struggling, the biggest change since the strong growth seen late last year is a deteriorating performance among larger companies, where surging order book growth just a few months ago has now turned into contraction, the first such decline seen in the series’ ten year history.”
5) The May ISM manufacturing index fell to 52.1 from 52.8 and that was 1 pt less than expected. Of the 18 industries surveyed, 11 saw growth vs 13 in April. There is also a growing number seeing an outright contraction, now totaling 6 vs 5 last month. ISM summed up the report by saying “Respondents expressed concern with the escalation in the US-China trade standoff, but overall sentiment remained predominantly positive. The PMI continues to reflect slowing expansion.”
6) Initial jobless claims totaled 218k, 3k more than expected and last week was revised up by 3k to also 218k. The 4 week average did fall to 215k from 218k last week as a print of 228k dropped out. Continuing claims rose by 20k after falling by a like amount in the week prior.
7) Mortgage applications to buy a home fell by 2.4% w/o/w and that’s the 4th week in a row of declines. They are now flat y/o/y.
8) The trade April trade deficit was as expected at $50.8b but internals softened. Likely reflecting the slowing pace of global trade, exports fell 2.2% m/o/m to the least since December. Imports also dropped by 2.2% m/o/m to the lowest amount since April 2018.
9) On the 5th anniversary of negative interest rates, Mario Draghi and the ECB still have taken no steps in mitigating the negative consequences. Draghi also thinks that more QE and deeper NIRP would actually be a help if needed. I’ll say again, the ECB has made itself irrelevant as a stabilizing force for the European economy and its banking system. They instead created an epic bond bubble, damaged bank profitability and left it completely powerless to deal with any emergencies that come its way.
10) The Eurozone manufacturing PMI for May was left unrevised at 47.7 as expected. Germany is where the most notable weakness is taking place with its index at 44.3. Markit said “Companies are tightening their belts, cutting back on spending and hiring. Input buying, inventories and employment are all now in decline as manufacturers worry about being exposed to a further downturn in demand.” The glass half full from Markit was “the decline masked slower rates of decline for both output and new orders” and “the forward looking orders to inventory ratio also picked up for a 2nd month running to reach a 6 month high, the improvement of which augers well for the downturn to moderate in June.” Let’s hope but “trade wars, slumping demand in the auto sector, Brexit and wider geopolitical uncertainty all remained commonly cited risks to the outlook, and all have the potential to derail any stabilization of the manufacturing sector.”
11) The UK manufacturing PMI fell below 50 at 49.4 from 53.1 and that was well below the estimate of 52.2. It was July 2016, immediately after the Brexit vote, that it was last in contraction. Markit said “New order inflows declined from both domestic and overseas markets, as already high stock levels at manufacturers and their clients led to difficulties in sustaining output levels and getting agreement on new contracts. Demand was also impacted by ongoing global trade tensions, as well as by companies starting to unwind inventories built up in advance of the original Brexit date. Some EU based clients were also reported to have shifted supply chains away from the UK.”
12) German May construction activity fell to a 4 month low. Homebuilding outperformed while civil engineering projects were a drag.
13) German industrial production in April fell by 1.9% m/o/m, worse than the estimate of down .5%. On the same day reported the Bundesbank cut its 2019 GDP forecast to .6%.
14) German exports in April dropped 3.7% m/o/m, well more than the forecast of a .9% decline. Imports were lower by 1.3% m/o/m vs the consensus fall of .2%.
15) Retail sales in the Euro area in April fell .4% m/o/m as expected. The y/o/y gain of 1.5% was the slowest since December.
16) China’s private sector weighted May services PMI fell to 52.7 from 54.5 and that was below the estimate of 54. That’s the lowest since February and Markit said this when referring to both manufacturing and services, “Overall, China’s economic growth showed some signs of slowing in May. Employment and business confidence in particular merit policymakers’ attention.” It’s manufacturing private sector PMI was unchanged m/o/m at 50.2. Caixin said this about business expectations, “Business confidence slipped to the lowest level since the series began in April 2012 in May amid concerns of an escalating China-US trade war and forecasts of relatively subdued global demand.”
17) Hong Kong’s May PMI fell to a 3 year low at just 46.9 from 48.4 in April. Markit said “Most concerning was a sharper contraction in new orders, led by lower demand from mainland China.”
18) Japan’s services PMI fell for a 3rd straight month but by a modest .1 pt to 51.7. The concern for many service companies is the upcoming hike in the VAT. Markit said this figure “Taken in conjunction with the earlier released manufacturing PMI, private sector output in Japan is growing at a rate that’s broadly in line with the underwhelming average seen in the opening quarter.” It’s manufacturing index fell to 49.8 from 50.2.
19) After 3 straight months of y/o/y declines, base pay in Japan rose just .1% y/o/y while overtime and bonus pay fell. Another reason to keep inflation as low as possible.
20) Household spending in Japan in April was up 1.3% y/o/y, half the expected gain.
21) The Singapore PMI for May fell to 52.1 from 53.3. Markit said “Headwinds remain apparent amid trade tensions between the US and China re-escalating, as well as the latter enduring slowing growth.” There is hope though as “the domestic market continued to provide support in May, defying the decline seen in export orders. Survey data also showed further gains in employment, while reports from panelists suggest that wages also rose, helping to support spending.”
22) India’s services PMI fell to 50.2 from 51. Markit is attributing some of this to “election disruptions” as “Signs that we may see a revival in the service sector in the near term were, however, evidenced by a pick up in hiring activity and improved sentiment.”
23) More manufacturing PMI’s: Taiwan 48.4 vs 48.2, Malaysia 48.8 vs 49.4, South Korea 48.4 vs 50.2, Vietnam 52 vs 52.5.
24) Pushing on a string, the RBA cuts rates by 25 bps to a new record low of 1.25% as expected.
Peter is the Chief Investment Officer at Bleakley Advisory Group and is a CNBC contributor. Each day The Boock Report provides summaries and commentary on the macro data and news that matter, with analysis of what it all means and how it fits together.