US economic momentum remains steady

Economic indicators largely continue to suggest that the US economy is on a steady growth path. The US Chicago PMI rose to its highest level in two-and-a-half years for the month of May, beating market expectations of a lower reading after a very strong previous month number. The ISM manufacturing index came in marginally higher for May (54.9) compared to April. Details of the report were healthy with gains in the new orders and employment sub-indices. On the labour market front, the ADP employment report showed private payrolls rising by 253,000 in May, significantly above consensus expectations. The only detractor from last week’s data run was the non-farm payrolls report, which rose by a smaller-than-expected 138,000 in May, relative to market’s expectation for a 182k gain. Details of the report was a tad weak as well, with net revision of -66,000 to prior two months’ numbers. Nevertheless, the unemployment rate continued to fall, which now stands at 4.3% (which is below last cycle’s low, observed in 2006/2007) from 4.4% in April.

Beyond economic data, US President Donald Trump remains a feature on financial headlines last week. He announced last Thursday that the US will withdraw from the Paris Accord, citing the reason that the Accord will impose unfair environmental standards on the US and disadvantage American workers and businesses. He vowed to renegotiate the environmental agreement, even as the leaders of France, Germany and Italy made an official statement that the Accord was “irreversible” and could not be renegotiated. This latest action prompted Tesla CEO Elon Musk and Walt Disney CEO Robert Iger to quit the President’s advisory councils, and it drew disapprovals from numerous other business leaders. Furthermore, according to Forbes, the governors of California, Washington, New York, Massachusetts, Vermont, Connecticut and Rhode Island have banded together to commit to meeting the targets of the Paris Accord. This again brings about questions on Donald Trump’s leadership, and his ability to push through tax reforms, which remains one of the most critical issue for markets.

Europe and Japan – economic momentum look encouraging

Outside of the US, Europe’s and Japan’s current economic momentum look encouraging as well. Final figures for Euro area’s manufacturing PMI for May came in at a strong 57, unchanged from earlier estimates. Inflation remains very subdued. Latest inflation figures released last week showed that Euro area headline inflation fell to 1.4% year on year for the month of May, from 1.9% in April. The decline was mainly due to lower energy prices. Core inflation dropped to 0.9% year on year in May from 1.2% in April, and was marginally below consensus expectation of 1.0%. Core inflation in the Euro are is likely to rise only at a very modest pace over the medium-term. In Japan, industrial production was reported to have rose 4.0% month on month in April, a rate of growth not seen since June 2011, when output was recovering rapidly in the wake of the Great East Japan Earthquake.

Asia and EM – data a tad mixed

The data read on China is a bit more mixed. China’s NBS manufacturing PMI was 51.2 in May, matching April’s level. However, the Caixin manufacturing PMI presented a much less robust reading, coming in below 50 at 49.6 in May, compared to 50.3 in April. That said, there are indications that monetary policy is less aggressive after the weakness in April’s activity indicators, suggesting any cyclical slowdown in the Chinese economy may not be steep.

India’s 1Q17 GDP growth was reported to have slowed to 6.1% year on year, but this was likely due to delayed impact of the demonetization operation last year. We expect figures to normalise in 2Q17. The Reserve Bank of India will meet this week, and consensus expectations is for policy rates to be unchanged.

In Emerging Markets, Brazil’s central bank Monetary Policy Committee (Copom) cut the policy SELIC rate by 100 bps to 10.25%, in line with market expectations. The decision was unanimous. In its post-decision statement, Copom indicated that a “moderate reduction in the pace of monetary easing compared to this meeting’s cut will likely prove adequate at the next meeting”. This suggests further policy easing will likely be at a slower pace. With inflation near a 10-year low and below the official 4.5% inflation target, there is room for the central bank to ease monetary policy further.

What all that meant for markets

US and Japan equities made new year-to-date highs last week, buoyed by the positive economic data and with markets increasingly shrugging off political noise from Washington. Performance in Asia Pacific ex-Japan equities was resilient as well, despite the weak Caixin manufacturing PMI from China. This week, market watchers will likely focus on the US ISM non-manufacturing index, trade and monetary data from China, ECB meeting and UK’s elections.

US 10-year Treasury yields dropped to 2.15% post the non-farm payroll numbers. Reflation expectation has been increasingly priced out of Treasuries. With broad US economic indicators still holding up, this lack of confidence on the growth outlook looks to be increasingly overdone.

USD lost ground last week, with the DXY Index down 0.75% for the week. The poor non-farm payroll numbers contributed to the weakness, though the down move in USD had started before that. This week, focus will be on the UK elections, with could drive volatility in the GBP.

Oversupply concerns continue to be a drag on crude oil, with the West Texas Intermediate down 4.3% for the week. US stockpiles have edged lower, but market watchers are ignoring that for now and placing greater emphasis on the rise in production. Gold pushed higher to end last week at $1,279, boosted by a weaker USD.


Week ahead:

Jun 5

  • US non-manufacturing ISM
  • UK services PMI

Jun 6

  • European services PMIs
  • Euro area retail sales
  • RBA meeting – market expects no change

Jun 7

  • Euro area GDP
  • RBI policy meeting – market expects no change to either repo or deposit rates
  • German factory orders
  • Japan current account

Jun 8

  • ECB policy meeting
  • China trade balance

Jun 9

  • UK trade data
  • UK industrial production

Jun 10

  • China money supply and credit data