The Global Markets Weekly – 5/9/16

Posted May 9, 2016 by rvillareal

Strong Enough, But For What When? [private]

The U.S. jobs report was certainly mixed but had something for everyone.  The headline jobs creation slowed to 160K, still a respectable figure, but well below expectations and the 225K trend of the past year.  This downshifting of hiring is consistent with an economy approaching full employment, with firms reducing the pace of hiring given the slowdown in corporate revenue and earnings.  A slower pace of job creation in turn would be more in keeping with the soft pace of spending behind the very soggy GDP gains of the last two quarters.

While job creation downshifted, wage gains (average hourly earnings) upshifted to 2.5%, close to the peak for this cycle.  A sustained acceleration in wage gains is also a sign of an economy approaching full employment when slack is being reduced.

In addition, the increase in the workweek meant that total hours worked rose a sizeable 0.4%, suggesting a decent gain in output even if labor productivity remains disappointing.  Together with the 0.3% wage gain means that labor income rose briskly last month, which could boost consumer spending gains in the months ahead.

An acceleration in wages cuts both ways, however.  While higher wage gains can lead to higher spending growth, they could also lead to higher price inflation and hurt already soft earnings.  But investors have been waiting for sustained wage acceleration for some time with several false starts and will remain skeptical that is it is finally happening now.

Few investors will change their positions based on this report.  Those looking for GDP growth to remain weak will find support in the slower pace of hiring.  Those expecting spending growth to bounce back will point to the increase in the workweek and the gain in wages.  However, even if GDP growth rebounds towards 3% this quarter, the bond market thinks the evidence will arrive too late to persuade the Fed to push the trigger in June.  DE thinks the chance of a June hike is still barely “live” but admits another jobs report like April’s (or a weak CPI) would delay the next rate hike to September.

• S.: Reports on the consumer (Fri) will top the data releases next week. Some bounce in retail sales is likely after surprising drop in March. Consumer sentiment is expected to continue its slow downward grind of the past year even though the overall level of nearly 90 is pretty healthy.  A few Fed speakers are on tap (Mon/Th) but none of the major players are on call.
• Eurozone: The coming week ends with an update to the Q1 Eurozone GDP flash reading on Friday. This should confirm that the Eurozone economy grew for a twelfth successive quarter in Q1, with GDP growth picking up to 0.6% Q/Q, better than in the USA and the UK last quarter. More solid activity data should also be seen through the week!
• UK: As has been the case for quite some time, no-one expects the BoE to alter policy when it gives it next policy verdict on Thursday. As for the accompanying Inflation Report, it will be interesting to see if it echoes the last report in February which hinted a rate hike may be somewhat closer than markets have recently been discounting and very much refuting market thinking that a fresh cut may occur.
• Japan: The highlight next week will be BOJ governor Kuroda’s speech which should help explain why the bank did not ease last meeting but provide some support to our notion that further easing steps are coming (Fri). The light data calendar includes a steady current account (Th) and flat tertiary activity (Fri).
• China: A busy calendar starts with the CPI (Tu) which should show a further acceleration to a 2.4% year-on-year gain. Industrial production (Sat) may fade a but from March’s 6.6% year-ago gain, not left reflecting the pickup in the PMI indexes.  Retail sales (Sat) should be strong with a 10% plus reading yoy
• Other central banks: In Norway, the Norges central bank may not exercise its easing bias, given further signs of core inflation rising well above the bank target and the recovery in oil prices. The economy is weak however and if the bank does ease, it may suggest further easing is much less likely.

gmw_0506 [/private]