With the use of the remaining 2020 carry-over leave week off complete, it appears that in my absence, the more things change, the more they stay the same. Friday’s US Non-Farm Payrolls rose by 559,000 jobs, a slight miss to consensus, but much less bad than April’s number. The number left something on the table for the inflationistas and the transitory inflation crew, meaning the arm wrestle continued. Currency and US bond markets remained in a choppy range; equities continued to grind higher, the world’s default position and commodities continued rising.
The issue appears to be getting Americans out of the house and into work, rather than a lack of jobs. In fact, the US NFIB Survey on Friday showed unfilled positions in small businesses has climbed to record highs of 48%. Federal benefits may be playing a part, but I believe that oversimplifies the issue. Child-care appears to be one stumbling block, especially with the summer vacation season approaches, and I am sure there are others.
The next major risk point for the month is the June 16th FOMC meeting. The Fed should be able to argue that with over 7 million fewer Americans in jobs than before the pandemic, no change, or even talk of change, in monetary policy is required. The NFIB survey suggests that employers will have to pay up to get people back to work through or wait for the summer season and those unemployment benefits to run their course. All of which is likely to be inflationary but does not tell us if it is transitory or structural.
The same can be said for raw materials inflation. Once the pandemic supply chain bottlenecks are cleared, will a return to the mean occur? Despite the noise and the chest-thumping from both sides of the ring, the honest answer is we just don’t know if price stresses will ease around the world towards the end of the year. The arm wrestle is set to continue, although I would argue that the state of the world is inconsistent with US 10-year yields continuing to hover around 1.60%. A move higher to 2.0% is more realistic. That might cause a few temporary nerves in the equity and precious metals space, but it should not derail the buy-everything rally. Only a tapering of central bank quantitative support will do that, and it will be fun to watch that unfold from the sidelines.
ECB expected to hold the course
One central bank we can guarantee will not mention the t-word this week will be the ECB. The rate decision should be a non-event, with the PEPP remaining unchanged. If anything, having never stopped quantitatively easing since the GFC, Europe is more vulnerable to tapering noise than the US. Nor will the ECB want to jeopardise the ongoing Eurozone recovery. Such talk is best left until after the long European summer holidays where a bombed-out tourism sector hopefully receives a boost.
Treasury Secretary Janet Yellen said overnight that she would welcome higher interest rates as a sign of recovery. I totally agree, but with the arm wrestle mentioned above, Ms Yellen will be waiting along with the rest of us. Markets have shrugged off the comments as they did the news from the G-7 of an agreement on a minimum 15% corporate tax rate. Most of Asia, particularly Singapore and Hong Kong, are either at or above that number. You can make the same argument globally as well.
China has just released its May trade data, and in USD terms, the surplus fell unexpectedly to USD45.53 billion. The fall was led by exports which rose a mere 27.90% YoY versus the 32.10% expected. To be honest, that is a cracking number by anybody’s standard and shows that global demand remains robust. That likely explains why the slight miss in exports has had little to no reaction in Asia.
This week’s highlights will be China inflation data on Wednesday and US inflation data on Thursday, with an ECB rate decision thrown in for good measure. We actually receive a flood of inflation prints from around the world, but it’s the big three that really matter. It would take a massive upside surprise move the inflation arm wrestle in favour of the inflationistas. Given the stubbornness of the US yield curve to steepen, the risk, if anything, is that lower to on market prints see it flatten, which should be another boost for equities if we needed another one. The US dollar would also suffer in this scenario.
Otherwise, it looks like a quiet day ahead for Asia. Another Non-Farm lowball lifted US equities on Friday. But the Yellen interest rate comments overnight look to have added a cautious note to Asia, with China’s export number not lifting the mood.
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