Good Morning: The Long & the Short of it and The Bigger Picture - 7 June 2019 - ADM ISI
- Digesting Japan Wages & Spending, dire German Trade & output and Buba
forecast cuts, soft French output and divergent comments on US/Mexico
negotiations; awaiting US and Canada labour data, G7 Finance Ministers
and Central Bank meeting
- Germany: poor production and trade rather unsurprising given survey data,
Bundesbank forecast cuts lean heavily against Draghi economic narrative
at ECB presser
- US labour data: ADP shocker probably best ignored given other anecdotal
evidence; expected to underline labour demand strong, but wages pressures
at best modest
- Canada labour data: reactive correction to outsized April gain likely,
but Unemployment Rate seen close to cyclical low; base effects to
predicate dip in wages
- Charts / Tables: Fed rate probabilities, Brent oil future; Global Oil
supply disruptions & Global Oil Demand
- Audio preview:
https://www.mixcloud.com/MOstwaldADM/adm-isi-morning-call-7-june-2019/
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** EVENTS PREVIEW **
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There is a busy schedule of data and events to end the week, even if politics and trade tensions will doubtless continue to offer the potential for 'off piste' headlines that ride roughshod over macro inputs, with the Dragon Boat Festival having closed markets in China, Hong Kong & Taiwan. Statistically, there are Japan's Wages (negative but better than expected) and Household Spending (weaker than expected), China FX Reserves, French and German Industrial Production and Trade along with Norwegian monthly GDP to digest, while ahead lie labour market reports in the US and Canada, and consumer inflation indices in Brazil and Mexico. On the events schedule, UK PM May stands down as leader of the Conservative Party, G7 Finance Ministers and central bank governors start their June summit, with a smattering of Fed speak thrown in for good measure. Next week will obviously continue to be dominated by trade and politics, though there the US, China, Japan and UK all have plenty of first division data to digest - US - CPI, PPI, Retail Sales, JOLTS; China - Trade, CPI/PPI & Lending; UK monthly GDP, Industrial Production, Trade & Construction Output; Japan - rev. Q1 GDP, Machinery Orders & PPI. The news flow on the US/Mexico immigration and trade tariffs talks continues to be mixed, with markets erring on the side of no tariffs, though that is anything but assured; the deadline is Monday. The comments from PBOC governor Yi Gang on some 'flexibility' on CNY FX valuations being 'good' would appear to suggest that China is as well as the US appears to be to engage in a currency war, which hardly bodes well for getting over the current impasse in trade talks.
** Germany / France - April Trade & Industrial Production **
- As has been the case for some time, the French output data were better than the numbers from Germany, though at Flat m/m 0.5% y/y for French Manufacturing Output, which followed a fall of 1.1% in March, the sector picture in France is hardly encouraging. As for Germany, another much worse than expected Industrial Production (-1.9% m/m -1.8% y/y vs. forecast -0.5% m/m), accompanied by a sharp 3.7% m/m slide in Exports vs. expectations of -0.9% and March's +1.6% m/m fit well with recent survey data, but underline that the Q1 GDP recovery was mainly due to transitory factors, and that Q2 may even dip back into negative territory. Adding insult to injury and running against Draghi's suggestion that incoming economic data were not bad, the Bundesbank has this morning slashed its 2019 GDP forecast to 0.6% y/y from 1.6%, and shaded forecasts down for 2020 & 2021, even if it was at some pains to stress that it expected H2 2019 to see a marked improvement.
** U.S.A. - May labour market report **
- The ADP shocker (+27K) on Wednesday will clearly skew market expectations to the downside of the median of 180K for headline Payrolls and 172K for Private Payrolls. However as is well documented the ADP report is a very unreliable predictor of the official data, and the ADP report was above all peculiar, in so far as the primary weakness was from a -52K in Small business employment (Manufacturing -33k & Services -19k), while medium and large size businesses expanded. There any number of reasons to be suspicious about the ADP report, firstly weekly jobless claims were very steady during the month (range 212K to 228K); the ISM surveys showed Employment Indices rising in May, and while regional surveys were mixed, there was nothing to suggest this sort of sudden hiring freeze, and the Beige Book said: "Employment continued to increase nationwide, with most Districts reporting modest or moderate job growth and others reporting slight growth, an assessment similar to the previous reporting period. Solid hiring demand was noted for retail, business services, technical, manufacturing, and construction jobs and by staffing agencies in general. However, stronger employment growth continued to be constrained by tight labour markets, with Districts citing shortages of both high- and low-skill workers." None of which is conclusive, but certainly raises a lot of reasons to doubt the ADP report . The consensus forecast as ever reflect nothing more than forecasters look at longer run averages, and adjusting up/down based on the strength or weakness of the prior month, which will as ever be subject to revision. Be that as it may, the Unemployment Rate is expected to hold at a 50-yr low of 3.6%, and it will be hoped that the U-6 Underemployment Rate hold its cyclical low of 7.3%, and perhaps a rebound in the Labour Force Participation Rate (62.8%) after last month's drop. However the markets' focus will be Average Hourly Earnings, where an expected 0.3% m/m would see the y/y rate hold at 3.2%, and Average Weekly Hours are seen reverting to the cyclical high at 34.5. While the US labour report has been waning in terms of market impact over the past 12 to 18 months, the hefty skew in terms of market Fed rate expectations suggests that surprises may garner rather more reaction than has been the case for much of the past year.
** Canada - May Employment **
- After an outsized 106.5K jump in April Employment (of which +73K was full-time), a subdued +5K gain is expected, though a modest setback would come as no surprise, and would be seen as a reactive correction, but with underlying labour demand still seen as strong, while the Unemployment Rate expected to stay close to its November cyclical low (5.6%) at 5.7%. Average Hourly Wages are expected to drift back to 2.4% y/y from 2.6%, primarily due to adverse base effects (May 2018 marked the recent peak with a jump to 3.93%). But as much as today's data is of interest from a macro perspective, politics, trade developments and oil prices will in the near-term be the ultimate arbiter of the direction of travel for the BoC, CAD and Canadian asset prices.