Weekly Market Update
Notable events over the last week
Equity markets largely shrugged off a number of potentially market moving events in a shortened holiday week. Friday’s weak US unemployment numbers were headline worthy, with a significant miss versus expectations, the report put further doubt that the FOMC would be able to follow through and raise rates in June or July. The chances of a rate hike in June reacted abruptly, falling to 4% from 22% on Thursday.
The May US non-farm payrolls report posted only a 38k gain for the month, well below the 160k that was anticipated. The Verzion strike weighed on the report by approximately 35k, however this failed to explain fully the notably weak growth as revisions removed 59k from the estimates of prior months. Average hourly earnings rose 0.2% MoM and 2.5% YoY, in line with consensus expectations. Average weekly hours fell slightly to 34.4. In slightly more positive news, the payrolls report contrasted with the Fed Beige Book. The report showed that ’employment grew modestly since the last report, but tight labour markets were widely noted’ and that ‘wages grew modestly, and price pressures grew slightly in most districts’.
US consumer spending provided further balance to the underwhelming May payrolls as the index rose 1% in April, the fastest pace in nearly seven years. Gains were driven by a 2.2% surge in outlays on durable goods, mostly fuelled by motor vehicles, while spending on non-durable goods rose 0.7%, driven by clothing, food and petrol. Indeed, the share of durable goods in overall consumption reached an all-time high last month.
Elsewhere, the UK pound continued to weaken last week following the results from various surveys showing the leave campaign gaining ground. The YouGov poll showed 45% of Britons would vote to leave the EU compared with 41% who would vote to stay in, while the ICM poll indicated that 48% were in favour of the UK leaving, up one point on last week, and 43% were in favour of remaining. Sterling’s value has become increasingly volatile as fears of a Brexit have increased among investors pushing the pound’s value to highest level of volatility since the first quarter of 2009. The pound dropped as low as 1.44USD last week although recovered slightly closing the week at 1.45USD.
In Japan, equities lagged and the yen firmed as markets were disappointed by PM Abe’s policy intentions this week. Abe clarified that that the government will postpone the April 2017 VAT hike to October 2019 however failed to provide any further details regarding the fiscal stimulus package and significant uncertainties remain. The Topix is now circa 13% lower YTD and trails the S&P 500 by a fifth over three years.
In China, PMI data was mixed with the May NBS manufacturing PMI flat at 50.1 (vs. 50.0 expected). Importantly this marks the third consecutive greater than 50 reading following 7 sub 50 prints. However, there were mixed developments in its largest subcomponents – the production index (52.3, previously 52.2) and new orders (50.7, previously 51.0). Separately, the Caixin/Markit final PMI declined slightly in May to 49.2 from 49.4, albeit in line with expectations.
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