The June Employment Report, due July 5, risks throwing more water on the idea of a 50 BP rate cut at the July 30-31 FOMC meeting. This is because there are reasons to expect Payrolls and Average Hourly Earnings to speed up. Whether the Unemployment Rate rises, falls or is unchanged is a wild card. Consensus is in line with these considerations.
The risk is for June Payrolls to speed up from May's +75k. While the Unemployment Claims data have not begun to trend down, their rate of deterioration between Payroll Survey Weeks has slowed. Consensus looks for +158k, a bit below the +164k m/m average over the first 5 months of the year. It will be of particular interest to see if Construction Jobs sped up in June. If they do, the speedup would argue that temporarily bad weather was a contributing factor to the weakness seen in May. It also will be of interest to see if the Nonfarm Workweek rises to 34.5 Hours, after having slipped to 34.4 Hours in the prior 2 months. This could be a harbinger of faster job growth ahead.
Average Hourly Earnings risk speeding up to +0.3% m/m or more from +0.2% in May. Consensus estimate is 0.3%. Calendar considerations argue for a high print this month. The y/y would edge up to 3.2% from 3.1% with a 0.3% m/m increase.
There are reasons to think the Unemployment Rate will edge up to 3.7% from 3.6%. The unrounded Rate was 3.62% in May, so it is closer to being rounded up to 3.7% than down to 3.5%. And, Continuing Claims rose somewhat between the May and June Survey Weeks. But, this evidence is not reliable. Consensus looks for an unchanged 3.6%.
The other important US economic report is the June Mfg ISM (due July 1). All the regional surveys appear to have fallen in June. But, some were at least in part catch-up to the decline in the May Mfg ISM. The Chicago PM, pushed ahead 1 month, has done a good job predicting the m/m direction of the Mfg ISM. If this relationship continues to hold, the Mfg ISM would rise in June and fall in July. A June increase would be a surprise. Consensus looks for a decline to 51.0 from 52.1 in May.
Sunday, June 30, 2019
Sunday, June 23, 2019
The Fed's Policy Shift and Q219 Corporate Earnings
Last week's FOMC Statement and "dot" chart affirmed market expectations of easier monetary policy in H219. While the markets
focused on the "dots" chart, the more flexible Statement may eventually
be more important. Nevertheless, the shift could offset the expected
anemic y/y for Q219 corporate earnings.
The Statement' said the Fed will "closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion." It provides for more policy flexibility than the dots' forecast of 50 BPs in cuts over the rest of the year. Since there are potentially temporary as well as longer-lasting reasons for the economic slowdown (see my blog of June 9), the economic evidence risks improving as the temporary drags disappear. And, the market reactions could be quick. So, the Statement's flexibility may turn out to be meaningful than the dots chart, which could change with market expectations.
At this point, evidence is building that the worst of the economic slowdown is behind us. Initial Claims moved back below the May average in last week's report. Motor Vehicle Assemblies bounced in May, suggesting the inventory correction in that sector is over. And, the increase in May Existing Home Sales suggests the drop in mortgage rates is finally beginning to spur housing demand.
But, it does not look at this point that economic growth is back to an acceptable pace -- which I assume to be 3.0%, an above-trend pace consistent with a desired speedup in inflation. The Atlanta Fed Model's forecast for Q219 Real GDP is now 2.0%. So, a 25 BP rate cut at the July FOMC Meeting looks reasonable. This expectation will likely sustain the stock market rally even though Q219 corporate earnings are expected to be anemic from a y/y perspective. (And, assuming US/China trade negotiations don't worsen further.)
Corporate Earnings for Q219 could be slightly weaker than for Q119, according to macroeconomic evidence. Even if the -2.5% y/y consensus estimate is too low, as is typical, the final count may very well be below the +1.6% posted for Q119.
The macroeconomic evidence for Q219 is not much different from that for Q119. However, US and non-US Real GDP Growth have slowed and profit margins may have shrunk somewhat -- price inflation slowed while wage inflation did not. Currency translations of earnings from abroad should hurt multi-nationals a bit less, though, as the dollar did not appreciate as much y/y as in Q119.
Markit
Eurozone Real GDP Oil Prices Trade-Weighted Dollar AHE Core CPI PMI
[ y/y percent change ] (level)
Q117 1.9 +65.3 2.3 2.7 2.2 55.6
Q217 2.1 +13.1 3.1 2.5 1.8 56.8
Q317 2.3 +6.0 -1.9 2.5 1.7 57.4
Q417 2.5 +12.7 -4.1 2.5 1.7 59.7
Q118 2.6 +21.5 -6.6 2.7 1.9 59.1
Q218 2.9 +41.0 -1.8 2.7 2.2 55.9
Q318 3.0 +45.4 +5.1 2.8 2.2 54.3
Q418 3.0 +6.7 +6.5 3.3 2.2 51.7
Q119 3.2 -12.8 +7.9 3.2 2.1 51.9
Q219 2.7 -12.9 +6.0 3.2 2.0 47.8
The Statement' said the Fed will "closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion." It provides for more policy flexibility than the dots' forecast of 50 BPs in cuts over the rest of the year. Since there are potentially temporary as well as longer-lasting reasons for the economic slowdown (see my blog of June 9), the economic evidence risks improving as the temporary drags disappear. And, the market reactions could be quick. So, the Statement's flexibility may turn out to be meaningful than the dots chart, which could change with market expectations.
At this point, evidence is building that the worst of the economic slowdown is behind us. Initial Claims moved back below the May average in last week's report. Motor Vehicle Assemblies bounced in May, suggesting the inventory correction in that sector is over. And, the increase in May Existing Home Sales suggests the drop in mortgage rates is finally beginning to spur housing demand.
But, it does not look at this point that economic growth is back to an acceptable pace -- which I assume to be 3.0%, an above-trend pace consistent with a desired speedup in inflation. The Atlanta Fed Model's forecast for Q219 Real GDP is now 2.0%. So, a 25 BP rate cut at the July FOMC Meeting looks reasonable. This expectation will likely sustain the stock market rally even though Q219 corporate earnings are expected to be anemic from a y/y perspective. (And, assuming US/China trade negotiations don't worsen further.)
Corporate Earnings for Q219 could be slightly weaker than for Q119, according to macroeconomic evidence. Even if the -2.5% y/y consensus estimate is too low, as is typical, the final count may very well be below the +1.6% posted for Q119.
The macroeconomic evidence for Q219 is not much different from that for Q119. However, US and non-US Real GDP Growth have slowed and profit margins may have shrunk somewhat -- price inflation slowed while wage inflation did not. Currency translations of earnings from abroad should hurt multi-nationals a bit less, though, as the dollar did not appreciate as much y/y as in Q119.
Markit
Eurozone Real GDP Oil Prices Trade-Weighted Dollar AHE Core CPI PMI
[ y/y percent change ] (level)
Q117 1.9 +65.3 2.3 2.7 2.2 55.6
Q217 2.1 +13.1 3.1 2.5 1.8 56.8
Q317 2.3 +6.0 -1.9 2.5 1.7 57.4
Q417 2.5 +12.7 -4.1 2.5 1.7 59.7
Q118 2.6 +21.5 -6.6 2.7 1.9 59.1
Q218 2.9 +41.0 -1.8 2.7 2.2 55.9
Q318 3.0 +45.4 +5.1 2.8 2.2 54.3
Q418 3.0 +6.7 +6.5 3.3 2.2 51.7
Q119 3.2 -12.8 +7.9 3.2 2.1 51.9
Q219 2.7 -12.9 +6.0 3.2 2.0 47.8
Wednesday, June 19, 2019
New Fed Debate -- 25 or 50 BP Cut
Following the softer FOMC Statement, the debate in the markets now
appears to be whether the Fed will cut by 25 or 50 BPs at the July FOMC
Meeting. Powell, at his press conference, was a bit two-handed in this
regard. He agreed that the Fed should act sooner and more aggressively
than otherwise because the funds rate is so close to the zero bound.
But, he also cautioned that the Fed will not react to any specific piece
of information. It will need to have a broad sense of economic softness.
While
the Statement and market analysts focused on low inflation as a reason
to ease policy, the real-side economic evidence may very well be key to
how aggressive the Fed will be -- assuming core inflation remains low.
Core Durable Goods Orders (Durable Goods Excluding Civilian Aircraft)
will be important, given the Fed's emphasis on softening capital
spending. Also, sustained gains in Retail Sales will confirm the Fed's
view that consumer fundamentals are good. Initial and Continued Claims will be important. Renewed downtrends in them might even stop the Fed from easing.
Sunday, June 16, 2019
Will the Fed Do Enough This Week?
The Fed will probably bow to market expectations at this week's FOMC Meeting by opening the door a little wider for a near-term rate cut. But, there is a risk officials will not widen the opening enough to satisfy market bulls. The Statement should downshift its description of economic and job growth, which could be enough reason to cut. To excite the markets, however, it might have to drop the word "patient" in describing monetary policy. How officials handle this word or what substitute word they use will likely be the key to evaluating the Statement.
There is no question that the Statement's first sentence describing the economy has to downshift. At the prior meeting in May it said; "Information received since the Federal Open Market Committee met in March indicates that the labor market remains strong and that economic activity rose at a solid rate." The overall description of the economy needs to acknowledge a slowdown in Q219. But, if the Statement mentions the possibility the slowdown is temporary, then the implication for monetary policy will be muted.
Similarly, the Statement may downshift the second sentence regarding the labor market. The prior Statement said, "Job gains have been solid, on average in recent months, and the unemployment rate has remained low." The comment regarding "solid" job gains probably should be modified, but not necessarily -- the sub-100k May Payroll gain could be chalked up to volatility.
In contrast to downshifting, the Statement would need to acknowledge a Q219 speedup in consumer spending in the opening paragraph rather than referring to the consumer slowdown in Q119 as did the prior Statement. Note that the Fed staff predicted that a near-term slowdown in economic growth will be followed by stronger growth. The question is how Fed officials will handle this outlook in their Statement.
The Statement should emphasize the continuing low inflation rate and subdued inflation expectations. In particular, Friday's University of Michigan Consumer Sentiment Survey showed a drop to 2.2% in the 5-year inflation expectations measure, a new low (I believe) in this series.
Last week's US economic data did not resolve the question whether the Q219 slowdown will soon be over. Overall manufacturing output was flat in May, after falling in April. And, Initial and Continuing Claims have moved up somewhat. There is no sign in this evidence that the slowdown is ending. But, there was positive economic evidence, too. Motor Vehicle Assemblies rebounded sharply, suggesting the inventory correction in that industry is over. And, Retail Sales sped up in May and were not as weak in April as the advance report said. Consumer strength argues that a temporary factor, such as bad weather, was at least partly responsible for the economic slowdown. It also shows that whatever caused the slowdown so far has not caused a snowballing downturn.
Even though the real-side data do not rule out the Fed staff's forecast of a temporary slowdown followed by a speedup in economic growth, the continuation of low inflation allows the Fed to move toward an easier stance. While the Atlanta Fed model's projection has moved up to 2.1% for Q219 Real GDP, there seems to be more room for non-inflationary growth. The possibility of 3% GDP Growth may very well be acceptable to Fed officials.
There is no question that the Statement's first sentence describing the economy has to downshift. At the prior meeting in May it said; "Information received since the Federal Open Market Committee met in March indicates that the labor market remains strong and that economic activity rose at a solid rate." The overall description of the economy needs to acknowledge a slowdown in Q219. But, if the Statement mentions the possibility the slowdown is temporary, then the implication for monetary policy will be muted.
Similarly, the Statement may downshift the second sentence regarding the labor market. The prior Statement said, "Job gains have been solid, on average in recent months, and the unemployment rate has remained low." The comment regarding "solid" job gains probably should be modified, but not necessarily -- the sub-100k May Payroll gain could be chalked up to volatility.
In contrast to downshifting, the Statement would need to acknowledge a Q219 speedup in consumer spending in the opening paragraph rather than referring to the consumer slowdown in Q119 as did the prior Statement. Note that the Fed staff predicted that a near-term slowdown in economic growth will be followed by stronger growth. The question is how Fed officials will handle this outlook in their Statement.
The Statement should emphasize the continuing low inflation rate and subdued inflation expectations. In particular, Friday's University of Michigan Consumer Sentiment Survey showed a drop to 2.2% in the 5-year inflation expectations measure, a new low (I believe) in this series.
Last week's US economic data did not resolve the question whether the Q219 slowdown will soon be over. Overall manufacturing output was flat in May, after falling in April. And, Initial and Continuing Claims have moved up somewhat. There is no sign in this evidence that the slowdown is ending. But, there was positive economic evidence, too. Motor Vehicle Assemblies rebounded sharply, suggesting the inventory correction in that industry is over. And, Retail Sales sped up in May and were not as weak in April as the advance report said. Consumer strength argues that a temporary factor, such as bad weather, was at least partly responsible for the economic slowdown. It also shows that whatever caused the slowdown so far has not caused a snowballing downturn.
Even though the real-side data do not rule out the Fed staff's forecast of a temporary slowdown followed by a speedup in economic growth, the continuation of low inflation allows the Fed to move toward an easier stance. While the Atlanta Fed model's projection has moved up to 2.1% for Q219 Real GDP, there seems to be more room for non-inflationary growth. The possibility of 3% GDP Growth may very well be acceptable to Fed officials.
Sunday, June 9, 2019
Would a Fed Easing Be Appropriate?
The markets are boxing the Fed into a rate cut. They assume the Fed will move to offset drags on the economy from tariffs, earlier monetary policy tightening and anything else. Powell and other Fed officials have indicated the Fed will act if needed to sustain growth. But, officials presumably need to see evidence that an economic slowdown will not end soon before doing so. Many Street economists expect the Fed to bend toward easing at the June 18-19 FOMC Meeting and then follow through with a cut in July. Whether Fed easing is appropriate could depend on the cause of slow growth. Unfortunately, the appropriateness of a cut will probably be known only after it happens.
There are at least four reasons for the recent slowdown -- /1/ uncertainty among businesses regarding the impact of tariffs, /2/ drag on the consumer from higher prices stemming from tariffs, the earlier run-up in oil prices, and shortfall in tax refunds, /3/ bad weather, /4/ lagged impact of 2018 Fed tightening, /5/ dissipation of boost from 2017/18 fiscal stimulus. Only the last two reasons truly justify a Fed easing.
Impact of Tariffs
A Fed easing will not necessarily be the correct offset to tariffs. The threat to company profits from higher imported input costs -- either from a pass-through of the tariffs or the higher costs associated with shifting production from China to other countries -- will remain after an easing. Instead, lower rates should boost commodity prices, hurting manufacturers and/or consumers. This is what happened in 2008, when the Fed cut rates drastically in the mistaken belief that the problem was an illiquidity issue. Rather, it was a confidence problem that lower rates did not address. The jump in oil prices, in particular, was a factor pushing the consumer off a cliff back then.
Drag on Consumer
The recent drags on consumer spending should be temporary and not prompt a Fed easing.
While the tariffs lifted the targeted goods' prices, they also resulted in a stronger US dollar -- reflecting an expected narrowing in the trade deficit. The stronger dollar not only offset some of the direct price hikes from the tariffs but lowered the prices of non-targeted import prices. The low inflation prints seen since late last year appear to confirm that the net effect of the tariffs is to lower inflation.
The drag from higher oil prices and shortfall in tax refunds also are behind us. Oil prices have retraced most of their earlier advance. And, the issuance of tax refunds is largely over. They now are less of a factor impeding consumer spending.
Bad Weather
Bad weather in the Midwest hurt construction spending in May, according to comments collected in the Non-Mfg ISM survey. There should be catch-up over June and July.
Lagged Impact of 2018 Fed Tightening
At the minimum, the Fed tightening over 2018 was overdone. Arguably, it was unnecessary, based on the absence of higher inflation. Nonetheless, monetary policy tightening affects the economy with a lag. The continuing sluggish housing activity -- the most interest-sensitive sector -- attests to the possibility that last year's tightening is still having an effect (as well as the bad weather). A Fed easing to unwind last year's tightening would seem to be appropriate.
Dissipation of 2017/18 Fiscal Stimulus
Most models predicted that the economic boost from the 2017 tax cut and 2018 Federal Government spending increase would begin to unwind in 2019. To be sure, some of the unwinding was expected to be caused by higher interest rates. So, to some extent this reason is "double counting" the 2018 Fed tightening reason. It is still a reason to justify Fed easing.
This Week's US Economic Data
Some of these ideas could be reflected in this week's US economic data. May Retail Sales should strengthen from April's low pace. Ex Auto Retail Sales may very well exceed the +0.3% m/m consensus (after +0.1% in April) -- as the temporary drags wear off. May core inflation should be benign, with the Core CPI possibly slower than the +0.2% m/m consensus -- held down in part by the stronger dollar. Anecdotally, airlines and phone companies are said to have engaged in price wars this month. May Industrial Production, particularly manufacturing output, should be sluggish -- in part dissipation of fiscal stimulus. Consensus looks for a slight +0.1% m/m for both.
There are at least four reasons for the recent slowdown -- /1/ uncertainty among businesses regarding the impact of tariffs, /2/ drag on the consumer from higher prices stemming from tariffs, the earlier run-up in oil prices, and shortfall in tax refunds, /3/ bad weather, /4/ lagged impact of 2018 Fed tightening, /5/ dissipation of boost from 2017/18 fiscal stimulus. Only the last two reasons truly justify a Fed easing.
Impact of Tariffs
A Fed easing will not necessarily be the correct offset to tariffs. The threat to company profits from higher imported input costs -- either from a pass-through of the tariffs or the higher costs associated with shifting production from China to other countries -- will remain after an easing. Instead, lower rates should boost commodity prices, hurting manufacturers and/or consumers. This is what happened in 2008, when the Fed cut rates drastically in the mistaken belief that the problem was an illiquidity issue. Rather, it was a confidence problem that lower rates did not address. The jump in oil prices, in particular, was a factor pushing the consumer off a cliff back then.
Drag on Consumer
The recent drags on consumer spending should be temporary and not prompt a Fed easing.
While the tariffs lifted the targeted goods' prices, they also resulted in a stronger US dollar -- reflecting an expected narrowing in the trade deficit. The stronger dollar not only offset some of the direct price hikes from the tariffs but lowered the prices of non-targeted import prices. The low inflation prints seen since late last year appear to confirm that the net effect of the tariffs is to lower inflation.
The drag from higher oil prices and shortfall in tax refunds also are behind us. Oil prices have retraced most of their earlier advance. And, the issuance of tax refunds is largely over. They now are less of a factor impeding consumer spending.
Bad Weather
Bad weather in the Midwest hurt construction spending in May, according to comments collected in the Non-Mfg ISM survey. There should be catch-up over June and July.
Lagged Impact of 2018 Fed Tightening
At the minimum, the Fed tightening over 2018 was overdone. Arguably, it was unnecessary, based on the absence of higher inflation. Nonetheless, monetary policy tightening affects the economy with a lag. The continuing sluggish housing activity -- the most interest-sensitive sector -- attests to the possibility that last year's tightening is still having an effect (as well as the bad weather). A Fed easing to unwind last year's tightening would seem to be appropriate.
Dissipation of 2017/18 Fiscal Stimulus
Most models predicted that the economic boost from the 2017 tax cut and 2018 Federal Government spending increase would begin to unwind in 2019. To be sure, some of the unwinding was expected to be caused by higher interest rates. So, to some extent this reason is "double counting" the 2018 Fed tightening reason. It is still a reason to justify Fed easing.
This Week's US Economic Data
Some of these ideas could be reflected in this week's US economic data. May Retail Sales should strengthen from April's low pace. Ex Auto Retail Sales may very well exceed the +0.3% m/m consensus (after +0.1% in April) -- as the temporary drags wear off. May core inflation should be benign, with the Core CPI possibly slower than the +0.2% m/m consensus -- held down in part by the stronger dollar. Anecdotally, airlines and phone companies are said to have engaged in price wars this month. May Industrial Production, particularly manufacturing output, should be sluggish -- in part dissipation of fiscal stimulus. Consensus looks for a slight +0.1% m/m for both.
Friday, June 7, 2019
May Job Growth Catches Up to Slowdown
The May Employment Report shows that job growth caught up to the slowdown seen in other US economic data in April. It is still not weak enough to guarantee a Fed rate cut, although it will keep alive those expectations.
The +75k m/m Payroll increase shows that jobs slowed in most industries and sectors, not just the ones typically associated with foreign trade or the business cycle. Bad weather still could have been a factor, as the comments in the May Non-Mfg ISM Report indicated. Also, some of the job weakness could be chalked up to volatility. Nevertheless, the Workweek remained low at 34.4 Hours, suggesting the economic slowdown is not about to end. Yesterday's Claims data raised the possibility that the improvement in labor market conditions has stalled. And, at this early point of the month, they did not signal a speedup in job growth in June.
To be sure, there are still a lot more data to see before a reliable estimate of Q219 Real GDP Growth can be made. The Atlanta Fed model's projection was up to 1.5% yesterday. And, some economic data, such as Retail Sales, should pick up in May. If upcoming data add up toward 2.0% Q219 Real GDP Growth, job growth should respond albeit with a lag.
The Household Survey was not as weak as the Establishment Survey, but still suggests a slowdown. Civilian Employment rose 113k m/m -- modest. The Employment-Population Ratio and Participation Rate have been steady for the past 2-3 months. The unchanged 3.6% Unemployment Rate remained well below the 3.9% Q119 average, however, arguing against Q219 GDP Growth being sharply below trend.
Labor cost inflation slowed a bit in May, consistent with calendar considerations. The below-consensus 0.2% m/m increase in Average Hourly Earnings (0.22% unrounded) pushed down the y/y to 3.1% from 3.2%. However, calendar considerations point to a 0.3% m/m increase in June AHE. The y/y would rebound to 3.2%. The trend remains flat and in line with most other measures of labor cost inflation.
The +75k m/m Payroll increase shows that jobs slowed in most industries and sectors, not just the ones typically associated with foreign trade or the business cycle. Bad weather still could have been a factor, as the comments in the May Non-Mfg ISM Report indicated. Also, some of the job weakness could be chalked up to volatility. Nevertheless, the Workweek remained low at 34.4 Hours, suggesting the economic slowdown is not about to end. Yesterday's Claims data raised the possibility that the improvement in labor market conditions has stalled. And, at this early point of the month, they did not signal a speedup in job growth in June.
To be sure, there are still a lot more data to see before a reliable estimate of Q219 Real GDP Growth can be made. The Atlanta Fed model's projection was up to 1.5% yesterday. And, some economic data, such as Retail Sales, should pick up in May. If upcoming data add up toward 2.0% Q219 Real GDP Growth, job growth should respond albeit with a lag.
The Household Survey was not as weak as the Establishment Survey, but still suggests a slowdown. Civilian Employment rose 113k m/m -- modest. The Employment-Population Ratio and Participation Rate have been steady for the past 2-3 months. The unchanged 3.6% Unemployment Rate remained well below the 3.9% Q119 average, however, arguing against Q219 GDP Growth being sharply below trend.
Labor cost inflation slowed a bit in May, consistent with calendar considerations. The below-consensus 0.2% m/m increase in Average Hourly Earnings (0.22% unrounded) pushed down the y/y to 3.1% from 3.2%. However, calendar considerations point to a 0.3% m/m increase in June AHE. The y/y would rebound to 3.2%. The trend remains flat and in line with most other measures of labor cost inflation.
Sunday, June 2, 2019
Is the US Economy Taking a Back Seat?
Trump's threat to use tariffs to achieve a non-economic foreign policy goal is not good news for the stock market. Even if Mexico capitulates to his demands, the risk is that the Administration will take its eye off the economy for some other goal in the future.
To be sure, with the Mexican President protesting innocence about allowing immigrants to travel unimpeded through Mexico and sending his Foreign Minister to Washington on Wednesday to explain the Mexican position, the market might just experience sharp volatility rather than head directly south.
A tariff on Mexican goods would be a drag on the US economy. Although a 5% tariff on the roughly $350 Bn in Mexican imports equates to only a $17 Bn tax hike, Trump threatened to raise it by 5% pts each month until it reaches 25% (bringing the tax to about $90 Bn).
Maybe more significantly, the tariff threat lowers the importance of the economy in the spectrum of policy targets -- never a good situation for stocks. The economy is now subordinate to immigration for the Administration. This means that while some of this week's key data for May risk strengthening, doing so will likely prompt only a muted boost to the market. The more important factor will be whether Mexico caves in to Trump's demand to stem the movement of immigrants toward the US (market positive) or retaliates in some way (market negative).
Meanwhile, developments in Asia do not look promising. A near-term agreement between China and the US does not look likely, as China is retaliating with an "unreliable entities" list. Moreover, North Korean President Kim Jong Un is reported to have executed 5 officials tied to the unsuccessful summits with Trump, including the special envoy to the US. This sounds like he closed the door on future negotiations, probably with China's consent.
Perhaps, Trump's heavy-handed approach to negotiating is backfiring. It may be facing the same failure as did the heavy bombing of London and Berlin in WWII. Rather than pressuring an adversary into submission, the bombing strengthened its resolve to fight harder. Note, however, that the bombing of Hanoi in the Vietnam War apparently succeeded in pushing the North Vietnamese to conclude peace talks. So, history is not one-sided on the issue.
The two key US economic data this week are the May Mfg ISM and Employment Report.
The May Mfg ISM risks rising, possibly by more than the consensus estimate of a slight increase to 53.0 from 52.8 in April. The two most reliable predictors -- Phil Fed Mfg Index (correctly predicting direction in 4 of 4 months this year) and Richmond Fed Mfg Index (correct 3 of 4 months) -- both rose in May. The Mfg ISM would have to rise above the 54.6 Q119 average to be viewed as strong.
May Nonfarm Payrolls should slow from the very strong +263k m/m April increase, based on Claims data. But, a gain over 200k cannot be ruled out, which would be well above the +180k consensus estimate. Payrolls averaged 186k m/m in Q119 and 223k over 2018. Perhaps more important will be whether the Nonfarm Workweek rebounds to 34.5 Hours (consensus estimate), after dipping to 34.4 Hours in April. A rebound would lift Total Hours Worked, making them more consistent with 2+% Q219 Real GDP Growth. In April, THW were only 0.5% (annualized) above the Q119 average. More generally, a rebound in the Workweek would suggest the April slowdown seen in many US economic data resulted from temporary problems, such as weather.
The idea of non-inflationary wage inflation will probably not be dispelled by May Average Hourly Earnings. Calendar considerations suggest a 0.1-0.2% m/m increase. The y/y would fall to 3.0-3.1% from 3.2% in April. In contrast, consensus looks for +0.3% m/m and a steady 3.2% y/y.
To be sure, with the Mexican President protesting innocence about allowing immigrants to travel unimpeded through Mexico and sending his Foreign Minister to Washington on Wednesday to explain the Mexican position, the market might just experience sharp volatility rather than head directly south.
A tariff on Mexican goods would be a drag on the US economy. Although a 5% tariff on the roughly $350 Bn in Mexican imports equates to only a $17 Bn tax hike, Trump threatened to raise it by 5% pts each month until it reaches 25% (bringing the tax to about $90 Bn).
Maybe more significantly, the tariff threat lowers the importance of the economy in the spectrum of policy targets -- never a good situation for stocks. The economy is now subordinate to immigration for the Administration. This means that while some of this week's key data for May risk strengthening, doing so will likely prompt only a muted boost to the market. The more important factor will be whether Mexico caves in to Trump's demand to stem the movement of immigrants toward the US (market positive) or retaliates in some way (market negative).
Meanwhile, developments in Asia do not look promising. A near-term agreement between China and the US does not look likely, as China is retaliating with an "unreliable entities" list. Moreover, North Korean President Kim Jong Un is reported to have executed 5 officials tied to the unsuccessful summits with Trump, including the special envoy to the US. This sounds like he closed the door on future negotiations, probably with China's consent.
Perhaps, Trump's heavy-handed approach to negotiating is backfiring. It may be facing the same failure as did the heavy bombing of London and Berlin in WWII. Rather than pressuring an adversary into submission, the bombing strengthened its resolve to fight harder. Note, however, that the bombing of Hanoi in the Vietnam War apparently succeeded in pushing the North Vietnamese to conclude peace talks. So, history is not one-sided on the issue.
The two key US economic data this week are the May Mfg ISM and Employment Report.
The May Mfg ISM risks rising, possibly by more than the consensus estimate of a slight increase to 53.0 from 52.8 in April. The two most reliable predictors -- Phil Fed Mfg Index (correctly predicting direction in 4 of 4 months this year) and Richmond Fed Mfg Index (correct 3 of 4 months) -- both rose in May. The Mfg ISM would have to rise above the 54.6 Q119 average to be viewed as strong.
May Nonfarm Payrolls should slow from the very strong +263k m/m April increase, based on Claims data. But, a gain over 200k cannot be ruled out, which would be well above the +180k consensus estimate. Payrolls averaged 186k m/m in Q119 and 223k over 2018. Perhaps more important will be whether the Nonfarm Workweek rebounds to 34.5 Hours (consensus estimate), after dipping to 34.4 Hours in April. A rebound would lift Total Hours Worked, making them more consistent with 2+% Q219 Real GDP Growth. In April, THW were only 0.5% (annualized) above the Q119 average. More generally, a rebound in the Workweek would suggest the April slowdown seen in many US economic data resulted from temporary problems, such as weather.
The idea of non-inflationary wage inflation will probably not be dispelled by May Average Hourly Earnings. Calendar considerations suggest a 0.1-0.2% m/m increase. The y/y would fall to 3.0-3.1% from 3.2% in April. In contrast, consensus looks for +0.3% m/m and a steady 3.2% y/y.
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