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The Global Markets Weekly – 6/1/18
Solid U.S. Jobs Report
After an upbeat report last month and a string of benign wage prints through April, the May jobs data points to a mild uptick in wage growth and solid implications for Q2 activity. DE sees real GDP growth moving to the high-3%-to-4% range this quarter after 2.2% in Q1. A 223,000 gain in jobs and a 0.3% gain in hourly earnings after a string of more moderate prints is positive for stocks and the dollar, while reinforcing expectations of a gradual move higher in short and long term interest rates.
(1) Strong jobs report, steady wage growth at 2.7% y/y, best since January. Little in terms of concerns for corporate profit margins just yet.
(2) Second quarter real GDP growth may push to 3-3/4%-to-4%, and DE expects average 3%-plus in the second half of this year. Continues our theme of a “New New Normal” growth pace for the next 2-3 years as the cyclical upturn persists. A similar pattern for the rest of the world, better results than in recent years save for pockets of Latin America and Eastern Europe.
(3) For the Fed and short term rates, the drop in the jobless rate to 3.8% and strong job gains plus firm wage growth will keep a June rate hike intact. We continue to expect two more in September and December, taking the funds rate well over 2%. Cash and equivalents becoming an alternative to stocks.
(4) DE’s 10yr Treasury yield forecast is 3-5/8% for year-end 2018, interest rates on average continue to move higher.
(5) Positive for the USD on a short-run basis, longer-run DE is also now on balance bullish, looking at rate differentials and the U.S. administration’s push on trade.
(6) For the equity market, growth fundamentals should outweigh the impact of higher interest rates on valuations as the monetary tide ebbs. DE’s fair value estimate for the S&P 500 remains 2800, and our year-end target is 3000. Comes with greater volatility and correction risks, but posting repeated new highs ahead into 2020.
Coming Week’s Key Indicators and Events
|Release||DE / Consensus||Comment|
|U.S.||May ISM NMan (Tu)
|+1.1 to 57.9/ +0.8||Survey and employment data confirming solid Q2 rebound, possibly 4% or better.
Trump/Abe, trade headline risks.
|Euro||Apr Retail (Tu)
Q1 GDP Rev. (Th)
|0.4% / 0.5% m/m
0.4% / 0.4% q/q
|Data releases secondary to Italy, ECB meets mid-June.|
|UK||May Svc PMI (Tu)
|-0.3 to 52.5/ +0.2
|Looking for some stabilization in PMI figure, GBP holding up against the EUR in recent week, down against the dollar.|
|Japan||Q1 GDP Rev. (Th)
|-0.2% / -0.2% q/q||Soft capex was a key factor in Q1 softness, watching trade frictions too. Unrevised from prior estimate.|
|China||May Cxn Svc PMI
May Trade Bal (Fr)
|52.9 / 52.9
|Trade data the bigger release given tariff and trade talk with U.S..|
|India||Rate Decision||Hold / Hold||Hike coming, unlikely this week.|
|Turkey||Repo Rate||+25 bps / +25 bps||Lira plunge warrants move but friction with government continues, market confidence rightly in short supply.|