The Global Markets Weekly – 6/5/17

Posted June 5, 2017 by rvillareal

Mixed Jobs Report Keeps Fed on Track but Cautious

Top-line nonfarm payroll job growth is disappointing at 138,000 in May (Consensus: 180,000; DE: 210,000), with the usual caveat that any single month’s report is more often noise than signal. While there has been deceleration over time (the 3m average sits at 121,000, the 6m average at 161,000, and 12m at 189,000), these are still figures above the pace required to drive further declines in the jobless rate. U-3 unemployment fell to 4.3%, but on a 429,000 drop in the labor force, while the U-6 measure, which DE feels is a better measure of underlying slack, fell to 8.4%. That compares to a 2006 low of 7.9%, and a 2000 low of 6.8%.

Average hourly earnings growth was steady at 2.5% y/y, treading water after cycle highs in late-2016/early-2017. The mixed underlying signals also include sector dispersion, with weakness in retail increasingly apparent since mid-2016. It is no secret traditional retailers are being consumed by online retail and existing cost structures that are increasingly unable to compete with the radical price transparency and convenience provided by the internet and low-cost shipping options.

Retail pressures are a different side of the persistently-low-inflation coin, with many firms still noting a lack of pricing power. One problem is that the median consumer is not the average consumer, as only a small slice of households have significant equity market or real estate exposure. Less-stable part-time, contract, or short-term work are increasingly prevalent. For this cost-conscious segment, quicker rent growth and rising medical care costs continue to squeeze buying power. Rising subprime auto loan concerns are one spot this is showing up.

Fed policymakers will grapple the low-inflation, low-unemployment dilemma in June, several expressing concern about the lack of inflation progress in recent months. Data suggest the labor market continues to improve and tighten on conventional metrics, but wages and inflation while grinding higher on average, remain quite subdued relative to pre-recession norms. This is a global phenomenon. We and consensus still expect a June hike, but incoming data call into question for now the need for a steeper path beyond. DE still expects at least one more hike beyond June, with higher-than-consensus odds for a total of four in 2017, but also now a wider range of three-to-five expected moves in 2018.

• S.: A very light week on the data front, limited to the May ISM Non-Manufacturing Survey (Mon) and April JOLTS data (Tue), plus April consumer credit (Wed). Revolving credit growth was weakest over a three-month stretch, through March, since 2013. The meatier news event will be former FBI Director Comey’s testimony before a Senate Panel on Thursday, relevant for investors as roadblocks to the Republican agenda mount.
• Eurozone: ECB meets Thursday and is set to keep policy on hold. But, in the face of a further drop in the unemployment rate to 9.3% in May (the lowest level since March 2009) and incoming data showing strengthening economic conditions, DE expects the ECB to adopt more hawkish language in the meeting’s minutes.
• Japan: Revised Q1 GDP (Thu) is likely to show a modest up revision after a string of firmer data last week.
• China: May consumer prices (Fri) will hold well below 2%, while there is some chance May loan data are released at the tail end of the week, important for a read on authorities’ efforts to tamp down on credit growth.

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