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The Global Markets Weekly – 4/27/18
Focus Back to the U.S. with Jobs, FOMC
After a week when plenty of potential catalysts left major U.S. averages and the 10yr Treasury yield effectively unchanged, next week brings yet more with a raft of activity data including payrolls, ISM surveys, and the FOMC decision. Meanwhile, Eurozone shares have quietly posted a fifth consecutive weekly advance as the euro moved off YTD highs. The message from the ECB last week (and the BOJ) was that the ripcord on stimulus needn’t be pulled just yet, as favorable momentum toward mandates remains incomplete.
Amidst the economic data, the ongoing corporate reporting season suggests investors are still pausing after a good deal was priced in coming into 2017. Rapid trailing earnings growth bears little or no correlation to market returns over the subsequent year, particularly later in the cycle, and expectations habitually miss turning points.
However, in DE’s view, the fundamentals and the outlook remain too solid to call the end of the bull just yet. Fiscal tailwinds are building and consumer spending fundamentals remain well intact despite rising rates. Rate increases do need to be monitored ahead for their impact on valuations, and we’ll get a check on the Fed’s feeling of urgency at this week’s meeting. Some hawkish housekeeping is possible ahead of a key June forecast reassessment.
Back to the U.S. jobs front, payroll gains continue to average around 200,000 despite what “should” be happening as the labor market tightens. Beneath the surface, the service sector has in fact seen a gradual slowdown on average on a trailing 6- and 12-month basis, as it’s the goods sector that’s seen a 6m- average pace of growth move steadily higher from effectively flat in mid-2016, to about 60,000 jobs per month on a 6m-basis for much of 2018.
As energy and dollar headwinds have abated, construction, mining, and manufacturing have recovered, bolstered by an undeniable pickup in global growth. That impulse more than accounts for the overall pickup we’ve seen in the aggregate jobs figures, so there may be less mystery than meets the eye. These headwinds turning to tailwinds have been a feature of corporate earnings reports. That helps explain why investors may be waiting to see more clarity on the run rate once base effects fall out in 2019, before diving back in in a rising rate environment.
Coming Week’s Key Indicators and Events
|Release||DE / Consensus||Comment|
|U.S.||Mar PCE Price (Mo)
Apr ISM Man (Tu)
Apr ISM NM (Th)
FOMC Decision (We)
Apr Payrolls (Fr)
|unch / unch m/m
0.6% / 0.4% m/m
0.4% / 0.4% m/m
58.2 / 58.5
57.9 / 58
Hold / Hold
4% / 4%
2.7% /2.7% y/y
|Headline and core prices move to 2% y/y, spending and income fundamentals solid heading into the second quarter.
Still strong, plenty consistent with 3%-plus GDP growth.
Laying groundwork for three more hikes in 2018, some hawkish adjustments, but unlikely to shock markets.
Wage growth key, goods sector has shown a strong pickup. Results plenty good enough to keep hikes on track.
|Euro||Q1 GDP (We)
Apr Flash CPI (Th)
|0.5% / 0.4% q/q
1.3% / 1.3% y/y
|Some moderation in Q1 not just weather, a factor behind ECB caution. DE expects ECB rates on hold in 2018.
Core CPI may decelerate back below 1% y/y as sluggish performance continues.
|China||Apr Manuf PMI (Fr)
|NA / 51.3||Bounced in March within a softening trend, holiday impacts washing out.|
|Australia Rate Decision (Tu)||Hold / Hold||Moderate growth and low inflation keep RBA on hold into 2019.|