The Global Markets Weekly – 6/6/16

Posted June 6, 2016 by rvillareal

U.S. Jobs Stumble Not a Game-Changer[private]

The May jobs report is surprisingly weak, even accounting for special factors. Nonfarm payrolls rose just 38,000, undershooting all estimates. Excluding 35,000 striking Verizon workers, the “true” figure is closer to 75,000, weaker than the downwardly-revised 123,000 in April (previously 160,000).

However, a single employment report in the context of solid underlying fundamentals is not decisive for DE in terms of shifting the outlook on either the U.S. economy, or Federal Reserve policy. As we noted in April, a softening jobs trend is more likely than not to be permanent, as labor force growth of 0.7% means that only 100,000 jobs, or even a bit less, need to be created to keep the jobless rate stable in the context of an economy near or at full employment.

Fed officials will approach June more cautiously than we earlier expected, but they will also be eying a solid set of consumer activity data in addition to signs of bottoming inflation, higher oil prices, and a weaker dollar. The transitory deflationary effects of lower crude oil prices will fade further over six-to-twelve months. Central bank policy will remain stimulative around the globe, China growth moderation looks like slippage, not collapse, and Eurozone growth is turning higher.

Taken together, DE is dropping June FOMC hike odds to 15%, from near-90%, while July odds move to 55%. The residual 30% we leave to September in the event jobs and activity rebound less strongly than we anticipate. Then, one more hike in December, and then likely four over the course of 2017.

Broad DE investment allocation recommendations are little-changed, favoring the risk-reward prospect of equity markets over fixed income despite near-term market moves. Over the short term, the report is dollar and equity market negative, and positive for fixed income—no surprise on a weak report. Ultimately, this expansion should still prove the longest in U.S. history, as underlying momentum and a lack of clear imbalances allows further economic and earnings growth.

• S.: A very light week kicks off with Fed Chair Yellen on Monday when she speaks in Philadelphia. The U of M consumer sentiment index (Fri) may consolidate a May rise, but inflation expectations in the release have been quite soggy.
• Eurozone: Surprising few, the ECB kept policy on hold at its June meeting. There was little new in the statement or in the ensuing Q&A save for a belated acknowledgement that the downside growth risks have eased somewhat, albeit with little change to its formal growth projections. There may be further reasons in the array of data this week that may suggest the ECB growth revisions still look too timid. Most notable will be the Q1 GDP update on Tuesday, figures that will show the strength in domestic demand.
• UK: As the BoE has been warning for some time, there is more and more evidence that companies, at least, are deferring spending decision in line of the uncertainty that the looming EU referendum is seemingly causing. All of which puts more emphasis on the April Industrial Production update on Wednesday. Otherwise, the question of how strong the housing market may be highlighted in the May Royal Institution of Chartered Surveyors house price survey on Thursday.
• Japan: Revised first quarter GDP may show a slight uptick from an advance 0.4%, while other data are generally limited to machinery orders (Thu) and the broader tertiary industry index (Fri). These will inform an upcoming BOJ meeting the following week, and the case for more stimulus is well intact.
• China: This week brings key reports on May activity, including international trade (Wed), and consumer prices (Thu), and we look ahead to industrial production and retail sales due next weekend (Sun).

gmw_0603[/private]