Original insights into market moving news

Week in Focus; week commencing 3 June 2019

  • MON: Swiss CPI, Turkish CPI, EZ, US/UK mfg PMI, US ISM mfg, construction spending, NZ trade
  • TUE: RBA, UK cons PMI, EZ CPI & unemployment, US factory orders, Aus GDP
  • WED: EZ, UK & US services PMI, EZ PPI, retail sales, US ADP, ISM non-mfg, NBP, Aus Trade
  • THU: German factory orders, RBI & ECB, EZ employment & GDP (F), US trade, unit labor costs, nonfarm productivity, Canadian trade
  • FRI: Swiss unemployment, German & French trade, German IP, US & Canadian labor market reports, US wholesales inventories



Following the bumper 335k in April, the Street expects 190k nonfarm payrolls to be added to the US economy in May. Bank of America's payroll growth tracking model sees an under-consensus 180k jobs being added, with the pace of jobs growth slowing. The bank points to the recent escalation in global trade tensions adding new uncertainty into the economy, likely weighing on business sentiment, and hiring intentions too at the margin. The bank also points to the cyclical slowdown in the autos sector, which has contributed to the announced job cuts which could be realised in the coming months. However, it does note the improvement in consumer sentiment, while the CB consumer sentiment jobs "hard to get" and jobs "plentiful" differential rose to a cyclical wide in the month, auguring well for the jobs data. BAML sees the rate of joblessness unchanged at 3.6%, and says we could see some modest firming of the participation rate following last month's 0.2ppts fall to 62.8%. It also sees average hourly earnings growth at a clip of 0.3% M/M (vs 0.2% prior), leaving the Y/Y rate at 3.2%. Average weekly hours are also seen unchanged at 34.5hrs.


The headline is expected to tick up by 0.2 points in May to 53.0, however, uncertainty is larger than usual, Nordea points out. "The divergence between PMI details and headline PMI index in, for example the Philly Fed regional survey, is almost record high," and the bank says that details like new orders and inventory ratios look "very worrisome," while headline prints stay elevated (Nordea says this is possibly due to frontloading of purchases before trade deadline). "A model based on regional surveys suggests a headline reading for ISM at >55, while the Markit PMI suggests downside risks," but "no matter the headline reading next week, we think that the PMI details (and the risk of an equity sell-off) suggest 50 or even sub-50 readings in ISM within the next four to five months." On the other side of the coin, it is worth noting that the uptick in the Chicago PMI, as well as gains seen in the Philly Fed, Empire State and Richmond Fed surveys augur well for the May manufacturing ISM.


The Federal Reserve’s Conference on Monetary Policy Strategy, Tools and Communication Practices will likely steer clear of comments on current monetary policy and the economic outlook, instead focussing on the Fed’s policymaking framework. Specifically, the conference will try and address concerns that a lower neutral rate has limited the scope for further rate cuts. Goldman Sachs does not expect the Fed to formally commit to a make-up policy shift such as price level targeting. The bank thinks the review will likely confirm the key roles of forward guidance and QE – which the Fed saw as effective during the recovery. “Next time, both would likely be linked to macroeconomic outcomes and deployed in a more forceful and systematic way once the FFR reaches its effective lower bound,” Goldman writes, “some tweaks to QE, such as greater reliance on a maturity extension program, could also emerge from the review.” Goldman Sachs sees the review as contributing to an only limited changes that would add little to the Fed’s toolkit in battling future recessions, which it says would not be a problem if the new tools already in hand are used more aggressively.


The ECB is expected to stand pat on rates once again with the June meeting coming amongst the backdrop of ongoing concerns around the fragility of the Eurozone economy as the Bank faces an uphill battle to normalise policy. On the data front, the Eurozone economy grew 0.4% in Q1; a development that exceeded expectations at the Bank. However, recent survey data continues to bring into question policymakers’ expectations for a H2 pickup, with the recent inflammation of global trade tensions and looming uncertainty of Brexit presenting further headwinds. Therefore, on balance, despite the slightly more upbeat than anticipated start to the year, Danske Bank looks for the latest staff economic projections to maintain a 2019 growth rate of 1.1% with a slightly more cautious approach thereafter with 2020 and 2021 growth to be lowered to 1.5% (Prev. 1.6%) and 1.4% (Prev. 1.5%) respectively. On the inflation front, Y/Y CPI rose to 1.7% from 1.4% in April with the core metric printing at 1.3% vs. Prev. 0.8%, however, some of the increase was driven by Easter timing effects which may have created some distortion in the data. Nonetheless, Danske Bank suggests that the technical assumptions of higher oil prices and easier financial conditions, should lift the 2019 HICP forecast to 1.5% from 1.2% before a softer growth outlook and energy price base effects drag on 2020 inflation (2020 forecast to be lowered to 1.4% from 1.5% with 2021 exp. unchanged at 1.6%). All-in-all, SGH Macro does not foresee any major shifts in rate guidance on the basis that “Draghi already extended at the last meeting the ECB’s commitment to the current -0.4% negative deposit rate,” and therefore, there is “not much room to expand from there”. Elsewhere, TLTRO3 will also be a key focus for the policy announcement, albeit the amount of specifics to be unveiled this week remains unclear with President Draghi suggesting during the April meeting that at the time, it was too early to discuss details. With this in mind, SGH Macro notes “from what we understand, the objective is to release the outlines of the program now in order to provide some leeway for the full rollout in September”. In terms of a consensus view for the terms of the Bank’s long-term loan programme, a recent newswire survey noted that analysts expect the rate on the two-year loans to be below the Bank’s 0% benchmark rate with a majority looking for a rate of -0.25% or lower; the perception of whether or not the details of the programme are seen as stimulatory or simply bridge financing will determine the market’s response to the unveiling. Finally, the prospect of tiering rates remains another factor for consideration, however, a recent ECB research paper and push back from policymakers such as Coeure, Weidmann and Nowotny has led analysts to believe that the prospect of such a system remains on ice for now. 


Consensus looks for Y/Y CPI of 1.3% (prev. 1.7%) with the ex-food and energy metric forecast to fall to 1.0% from 1.4% with the anticipated drop-off attributed to the timing of this year’s Easter break. As such, the question for markets is not will inflation continue to evade the ECB’s mandate, but to what extent. In terms of regional proxies, German CPI Y/Y fell to 1.3% from the April 2.1% reading, prompting ING to question “the ECB’s view that the pass-through of higher wages on inflation is still intact.” With this in mind, the Dutch Bank opines that the even though it is not their base case, “additional easing measures this summer should not be ruled out”.


After a blockbuster (and monthly record) 106.5k jobs were added to the Canadian economy in April (and a total of 426k over the last 12 months), RBC is looking for +5k in May. "The risk of a significant decline is certainly there, but we would note that other employment reports (e.g. SEPH) have employment growth in the same ballpark on a year-ago basis," RBC says, "the labour force has also grown by a similar amount and the unemployment rate is only 0.2ppts lower (5.7%) than it was in April 2018, and we see it unchanged in May." The bank notes that wage growth has risen for five consecutive months for permanent workers, to a rate of 2.6% Y/Y, above the bank's own 2.2% Y/Y tracking for the BOC's wage common measure (for Q1), but says it is still below what would be expected at full employment (which RBC says should be 3%+).


Citi sees Chinese FX reserves declining by USD 24bln, leaving them at around USD 3.071trln. The bank says yuan depreciation might have led to a negative FX valuation effect of around USD 4.5bln through 27/May. "The resumption of the trade war has led to a 3% M/M depreciation of USDCNY, and the PBOC seems to have intensified FX intervention in May," adding that specifically, "the tumbling of Chinese equity markets also saw a USD 9.4bln of capital outflow from stock connects between Hong Kong and the Mainland."


Both aggregate financing and new yuan loans are seen rising. Citi suggests that the wait and see monpol stance after the April Politburo meeting has already reversed to an easing bias again. Citi sees new total social financing at 1.6trln yuan and TSF growth might have accelerated to 10.7% Y/Y.


Given the PBOC moves to ensure sufficient liquid as trade wars resumed, injecting some CNY 552bln of liquidity via OMO and MLF operations, M2 money supply is seen ticking up by 0.2ppts to 8.7% Y/Y. The targeted RRR cut has also injected some CNY 280bln of permanent liquidity, analysts note. Citi notes that some of this liquidity injection will be offset by fiscal deposit increase.


Although the consensus view looks for the RBI to leave the repo rate unchanged at 6.00%, some analysts expect that the low headline rate of inflation will be used as the rationale for a 25bps rate cut next week, which would take the RBI's policy rate to 5.75%. Capital Economics, however, warns that this approach, where the central bank is allowing its control of inflation to slip, and that raises the risk of a strong rebound in price pressures in the quarters ahead, which in turn will require a higher policy rate.