Last week Friday’s US non-farm payroll data for May was the key focus for markets as investors try to gauge the strength of the economic recovery and given that the last release missed expectations by a large margin. Earlier in the week, US data releases were generally robust showing the benefit of the vaccinations and reopening of the economy: the May US ISM manufacturing reading came in slightly ahead of expectations at 61.2, and the ISM services index increased to 64, ahead of expectations of 63.2.
The non-farm payroll (NFP) data for May came in at 559,000 jobs added, below expectations of 675,000 jobs (Bloomberg survey) and the prior month’s figure was revised up to 278,000 from 266,000. The unemployment rate came in at 5.8% versus expectations of 5.9% and the prior month’s reading of 6.1% but the participation rate for May edged lower to 61.6% from the prior month of 61.7%. Average hourly earnings grew 0.5% on the month versus the prior month of 0.7% mom and expectations of 0.2% mom. Overall the data pointed to the economy making progress but not enough to trigger the Fed’s hurdle of “substantial further progress”. However, as John Williams, the New York Fed President commented on Thursday the Fed does appear to be closer to considering discussing tapering: "We have to be thinking ahead, planning ahead, and so I do think it makes sense for us to be thinking through the various options that we may have in the future" but that “I just don't think the time is now to take any actions". Thus, USTs rallied following the NFP data. Ahead of NFP data the yield of the 10 year UST traded in a range of 1.59-1.63% but then rallied into Friday’s close to end the week 5 bps tighter at 1.55%. The 5s30s spread tightened 3bp to 145bps. The S&P 500 gained 0.61%.
Elsewhere, China’s PMI data remained comfortably in expansionary territory although some readings were below expectations: the May official manufacturing PMI came in very slightly below expectations (Bloomberg survey) at 51 but the Caixin Manufacturing May PMI was in line with expectations at 52. The official non-manufacturing May PMI was slightly ahead of expectations at 55.2 but the Caixin Services reading was below expectations at 55.1. Also China’s announced a shift to a 3 child policy to try and improve the demographic profile of the country. Higher oil prices were also of note with Brent crude trading above USD 70 per barrel on the back of the recovery in oil demand with the reopening of economies and oil inventory levels being drawn down. Following an OPEC+ meeting on Tuesday, April’s guidance of increased output was ratified at the June meeting which will see the gradual return of 2 million bpd to the market in the May-July period. The next meeting is due on July 1st.
In the week ahead, the ECB meeting and post-meeting press conference with ECB President Christine Lagarde on Thursday will be a focus. A new set of economic forecasts are due and there are signs of economic recovery but Lagarde is likely to point to it still being premature for changes to the pace of PEPP bond purchases. Last week, the Eurozone CPI for May increased to 2% yoy, ahead of expectations of 1.9% yoy, and up from 1.6% yoy the prior month: higher energy prices were a key driver but core CPI remained subdued coming in at 0.9% yoy, although ECB officials have been highlighting transitory inflation pressures. Other central bank meetings next week include the Bank of Canada meeting on Wednesday. The Russian central bank rate decision is also due on Friday with any further rises in rates the focus. There are no Fed speakers this week due to the media blackout ahead of the FOMC meeting on 15-16 of June.
Key US data releases include the May CPI data due on Thursday given that last month’s data surprised to the upside: the Bloomberg survey is looking for a reading of 4.7% yoy up from 4.2% yoy last month. Core CPI is expected to rise 3.4% yoy up from 3% yoy in April. Other data releases include the preliminary June University of Michigan Consumer Confidence reading on Friday. In the Eurozone, the focus will be on the ZEW survey of expectations on Tuesday and the German and French industrial production data for April. Earlier today China’s trade data for May showed exports gaining 27.9% yoy and imports gaining 51.1% in dollar terms. On Wednesday, China’s inflation data is also due: PPI inflation will be closely watched with last month’s reading registering 6.8% yoy. The Bloomberg survey is looking for a reading of 8.5% yoy. China’s CPI data has been more subdued and expectations for the May reading to gain 1.6% yoy. In Japan, the revision to Q1 GDP will be watched for any improvement from the last -5.1% quarterly annualised reading. Other events this week include the G7 summit to be held in the UK.