Market News

• U.S. is not interested in disconnecting with China
• Neither country is interested in disrupting ties

The Commerce Department said on Thursday the U.S. wholesale inventories increased 0.8 percent m-o-m in April, after being flat m-o-m in March. That marked the first decline in wholesale inventories since October 2017.

Economists had forecast wholesale inventories growing 0.7 percent m-o-m in April.

On a y-o-y basis, wholesale inventories surged 7.6 percent.

According to the report, wholesale auto stocks surged 3.8 percent m-o-m in April, the largest gain since August 2018.

Meanwhile, wholesale sales dropped 0.4 percent m-o-m in April following an unrevised 1.8 percent m-o-m gain in March. 

James Smith, developed markets economist at ING, notes that the latest U.S. jobs report has done little to stem the wave of economic pessimism sweeping over markets. 

• "Jobs growth slipped to 75k, although importantly we think is more likely to be down to constrained supply rather than weaker demand for labour. Admittedly there have been one or two pockets of weakness – manufacturing employment growth has slowed in recent months, but in May, manufacturing growth barely moved from the previous month (slowed to 3000). However, we expect it to come under further pressure as production slows in the near-term
• The manufacturing sector isn’t immune from the wider skill shortage issue that has swept through the jobs market. The NFIB small business survey suggests that almost 40% of firms have positions they cannot fill, while these firms cite labour quality as by far their single biggest problem.
• In other words, a slower trend in jobs growth over coming months shouldn’t necessarily be interpreted as a sign of emerging weakness. Importantly, there are broad signs that these supply constraints are gradually translating into higher wage growth.
• Average hourly earnings missed estimates but still rose by 0.2% on the month and there are also signs are having to offer a broader range of incentives to retain/attract staff. The latest Federal Reserve Beige Book talked of firms using expanded benefits packages to improve retention.
• In short, the latest jobs report still suggests the US economy is in relatively solid shape for the time being. With wage growth outpacing inflation and consumer confidence close to multi-year highs, consumer spending should continue to underpin overall growth during the second quarter.
• But with rising concerns over where President Trump will take his trade war to the next stage, risks facing the economy are undoubtedly growing – albeit the 100bp of easing now priced in by the end of 2020 may be a little overdone."

• One shouldn't resort to one-sided approaches and protectionism

U.S. stock-index futures rose moderately on Friday, as soft jobs data increased odds of easier monetary policy.

Global Stocks:

(company / ticker / price / change ($/%) / volume)

Statistics Canada reported on Friday that the number of employed people rose by 27,700 m-o-m in May, while economists had forecast a gain of 8,000 and after an unrevised surge of 106,500 in the previous month.

Meanwhile, Canada's unemployment fell to 5.4 percent from 5.7 percent in April, below economists’ forecast of 5.7 percent. It was the lowest jobless rate since comparable data became available in 1976.

According to the report, full-time employment increased by 27,700 in May, while part-time jobs were unchanged.

In May, the number of private sector employees declined by 20,700 (-0.2 percent m-o-m), while the number of public sector employees dropped by 13,100 (-0.3 percent m-o-m). At the same time, the number of self-employed surged by 61,500 (+2.1 percent m-o-m) last month.

Sector-wise, there were more people working in health care and social assistance (+20,000), professional, scientific and technical services (+17,000), as well as transportation and warehousing (+10,000) In contrast, employment decreased in business, building and other support services (-19,000), accommodation and food services(-12,000), and public administration (-9,000).

On a year-over-year basis, employment grew by 453,000 (+2.4 percent), reflecting gains in both full-time (+299,000) and part-time (+154,000) work. 

The U.S. Labor Department announced on Friday that nonfarm payrolls increased by 75,000 in May after a downwardly revised 224,000 gain in the prior month (originally an increase of 263,000). It marked the smallest increase since February.

According to the report, employment rose in professional and business services (+33,000 jobs) and in health care (+16,000) and showed little change in other major industries.

At the same time, the unemployment rate remained at 3.6 percent in May.

Economists had forecast 185,000 new jobs and the jobless rate to stay at 3.6 percent.

The labor force participation rate was unchanged at 62.8 percent in May, while hourly earnings for private-sector workers rose 0.2 percent m-o-m (6 cents) to $27.83, following an unrevised 0.2 percent m-o-m gain in April. Economists had forecast a 0.3 percent m-o-m advance in the average hourly earnings. Over the year, average hourly earnings have increased by 3.1 percent.

The average workweek was unchanged at 34.4 hours in May, compared to economists’ forecast of 34.5 hours.

• Willing to share new technology, 5G with partners 

• We're still quite confident that the U.S. economy will continue to grow
• Trade war is bringing uncertainty and is negative for growth globally
• Expects reduction in investment but doesn't see that as strong enough to tip the US economy into recession 

Analysts at ANZ  are seeing the RBA’s Governor speech at Tuesday’s RBA Board dinner as effectively a call to action for monetary policy and now expect it to cut in August and November.

• “From that point, the outlook for policy becomes more uncertain. For one thing it will depend on how the data responds to the RBA rate cuts and the sizeable tax stimulus in the second half of this year. Past experience suggests lower interest rates stimulate the housing market, potentially turning price declines into price increases. This would pose an enormous challenge for the RBA, which does not want further growth in household indebtedness.”

Analysts at TD Securities are expecting the Canadian employment to decrease by 5,000 in May, which would give back a small portion of the record 106,500 jobs created the prior month.

• “This should push the unemployment rate slightly higher to 5.8% while wage growth for permanent employees should drift lower to 2.5% y/y (consensus: 5.7%, 2.5%, respectively).
• Capacity utilization for Q1 will round out the data calendar; the market looks for capacity utilization to fall to 81.0% from 81.7% across the industrial sector, which is consistent with the Bank of Canada's Business Outlook Survey reporting a smaller share of firms experiencing capacity pressures.”

According to Ulrich Leuchtmann, an analyst at Commerzbank, we have more EUR/USD negative factors to consider and have had to adjust their EUR/USD forecast to the downside, in particular until year-end 2019.

• “We nonetheless continue to expect a rise in EUR/USD levels – but now mainly from 2020 onwards.
• Why do we remain optimistic for EUR/USD? The most convincing reason is the Fed’s monetary policy – and that will remain the case. Its about-turn is likely to make the high USD valuation seem increasingly questionable. And in this context, it is not as decisive whether the Fed will cut its key rate one, two or three times. The fact that the greenback’s rate advantage will tend to diminish is likely to be the dominating factor for the EUR/USD exchange rate.”

Analysts at TD Securities say that Wednesday’s ADP Employment report surprise of 27,000 was enough of a miss, nearly 160k below consensus to convince them to reduce their forecast for Friday's nonfarm payroll release to 140,000 for May, from their earlier estimate of 190,000.

• “This soft but not concerning print follows an eye-popping 263k print in the previous month. As such, we would view a number in this mid-100k range as an overdue correction to an unsustainable run rate for payroll growth, rather than the leading edge of a sharp slowdown in economic activity — although we recognize markets will take little comfort in the event.
• All in, the household survey should show the unemployment rate remained steady at 3.6% for May, while wages are expected to rise 0.2% m/m.”

• TLTRO-3 should not be a permanent instrument of ECB 

Carsten Brzeski, a chief economist at ING Germany, notes that both industrial production and trade fell in April, adding to the latest concerns that the eurozone’s largest economy will not be able to maintain its growth pace of the first quarter of the year.

• "Industrial production fell by a sharp 1.9% month-on-month in April, from 0.5% MoM in March, the first drop since January this year. On the year, industrial production was down by 1.8%. Production in all sectors dropped, except for activity in the construction sector.
• At the same time, German exports (seasonally and calendar adjusted) fell like a stone, dropping by 3.7% MoM in April, from 1.6% MoM in March. Imports decreased by 1.3% MoM, from 0.4% MoM in March. As a result, the trade balance shrank to €17.94 billion in April from €22.6 billion in March.
• Let’s be clear, this is a horrible start to the second quarter for German industry, as global trade tensions, as well as temporary problems in the automotive sector and chemical industry, have left their marks. One-off factors should have disappeared by now and even turned into temporary positives. Yet the experience of the last few years shows that there is almost always another disruptive one-off factor waiting around the corner. This means that industry will continue to fluctuate between, on the one hand, low interest rates, high capacity utilization and a strong need for new investments which eventually should be supportive and, on the other hand, disruption from trade tensions as well as structural changes in the manufacturing sector.
• Despite the order book deflation since last summer, businesses still report filled pipelines of assured production. At the same time, however, another sharp increase in inventories brings back memories of last year and should curb the optimism.
• The German export sector also continues to suffer from the trade conflict. But it's not all gloom and doom. Maybe it was hoarding in the run-up to the first Brexit deadline but exports to the UK increased in the first few months of the year. In fact, German exporters almost sold as much to the UK as to China over this period. Also, the share of exports going to the US slightly increased though this could clearly be a two-sided sword as it is shows how vulnerable the German economy is to possible US tariffs. At the same time, the weakening of the effective exchange rate since September 2018 should have partly cushioned the negative impact from global trade tensions. Currently, the effective exchange rate is below its 2018-level, providing some tailwind for exports in the months ahead.
• Looking ahead, the past has often shown that a single month is clearly not a good illustration of German industry or the entire economy. The April data could even be partly distorted by seasonal effects. However, there is no doubt that the German economy had a disappointing start to the second quarter, justifying the European Central Bank's new dovishness. It now needs even stronger domestic demand and a bounce-back in May and June to avoid a return to the recessionary territory."

“Nonfarm payrolls surprised to the upside in Apr as 263k jobs were created. The Apr gain left the 3-month average at 169k. Come May, we look for a gain in line with this average at 170k. Said outcome would be consistent with employment growth ahead of population growth. Having declined from 3.8% to 3.6% in Apr, we expect the unemployment rate to stabilise in May. The risk is that an uptick in participation results in the unemployment rate edging back up to 3.7%. Having trended higher over a number of years, prime-aged participation has turned down of late. This uptrend is however likely to return in time, given employment's continuing strength. Available slack continues to limit wage gains. A 0.3% gain is expected in May.”

According to Karen Jones, analyst at Commerzbank, GBP/USD pair remains upside corrective very near term and has reached the 23.6% retracement at 1.2753, where it is consolidating.

“It will need to regain this on a closing basis as an absolute minimum in order to alleviate immediate downside pressure and avert further losses to the 1.2444 December 2018 low. We are looking for the correction to extend to the 38.2% retracement at 1.2873, where we suspect it will stall. Minor resistance lies at the 1.2772 February low ahead of the 1.2865 April low. Immediate downside pressure will be maintained while no rise above the 200 day moving average at 1.2945 is seen. Next up is the May 10 high at 1.3048. Only if this level were to be exceeded, would we look for the 1.3185/97 April and current May highs to be retested.”

According to analysts at ING, it now seems the market is convinced that the Federal Reserve has to act after all the discussion about whether the flat/inverted US yield curve portends the next US recession.

“Beyond the aggressive pricing of Fed cuts (67bps by the end of 2019 and another 33bp by end 2020), we are starting to see a clear, bullish re-steepening of the US 2-10 year Treasury curve. During the last three major Fed rate cutting cycles this curve steepened around 250bp as reflationary Fed policy filtered through the market. Typically a weaker dollar plays a role in reflationary US policy, but its decline is not always immediate.”

The British public's expectations for inflation in five years' time have jumped to their highest in more than a decade, Bank of England data showed.

The public's average expectation for inflation in five years rose to 3.8% in May from 3.4% in February, a quarterly survey by the BoE showed.

Short-run inflation expectations for the next 12 months edged down to 3.1% from 3.2%.

Economic initiatives undertaken by the Japanese government and aggressive easing policies from the country’s central bank have injected new growth momentum into the economy. According to a senior banking executive, however, that’s come with some negative consequences.

The Bank of Japan’s quantitative and qualitative easing policy has created market disruption and has hurt the safety and stability of Japanese financial markets, Nobuyuki Hirano, chairman of Mitsubishi UFJ Financial Group, told.

According to Hirano, as the central bank acquires more Japanese government bonds, the liquidity in that market is drying up. Meanwhile, the Bank of Japan’s purchase of exchange-traded funds in stock markets is affecting the price mechanism, he added.

While Hirano said it is important to “carefully analyze” the balance between the benefits and adverse side effects, he added that the current interest rate policy means it is a “really tough environment for the banks, in particular regional banks.”

Jakob Christensen, chief analyst at Danske Bank, points out that the ECB turned its back on the dovishly priced market and the market reacted by appreciating the EUR and lowering inflation expectations.

“As for EUR/USD, it is now faced with a Fed ready to cut rates and an ECB who has only started discussing easing. That should keep positive EUR/USD momentum going. We forecast EUR/USD at 1.15 in 6M. A sound US jobs report could temporarily weigh on EUR/USD though, but it should not derail the outlook for a summer Fed rate cut.”

According to the report from Istat, in April 2019, estimates of retail trade in value and volume terms remain unchanged compared with March 2019.

In the three months to April 2019, both value and volume of retail trade stay broadly flat at 0.0% and -0.1% respectively when compared to the previous three months (Nov 2018 – Jan 2019).

Year-on-year growth in the value of sales increased by 4.2%, while the quantity sold rose by 4.6%.

Large scale distribution reported a large spike in retail sales, increasing by 7.5% year on year, while small scale distribution was up 0.6%. Online sales saw a year-on-year rise of 17.2%.

Looking at the value of sales for non-food products, the strongest growth was reported for computers and telecommunications equipment (+4.7%), cosmetic and toilet articles (+3.1%), while the largest falls concerned shoes, leather goods and travel items (-3.3%) and clothing (-1.3%).

British employers increased their spending on temporary staff at the weakest rate in more than six years and hired fewer permanent staff, recruiters said, suggesting Britain's robust labour market will weaken.

Retail and construction saw the biggest fall in demand for staff while nursing and computing remained strong, the Recruitment and Employment Confederation (REC) said in its monthly report.

"Recruiters are reporting that demand for staff is slowing and their clients are reducing business activity on average," REC chief executive Neil Carberry said.

Accountants KPMG, who sponsor the report, blamed Brexit uncertainty. Unlike the rest of Britain's economy, the job market has performed strongly since the Brexit referendum in 2016. Unemployment fell to its lowest rate since 1975 at 3.8% in the first quarter of 2019, official data has shown.

According to the report from Halifax Bank of Scotland, on a monthly basis, house prices rose by 0.5%, to £237,837

In the latest quarter (March to May) house prices were 2.5% higher than in the preceding three months (December to February).

House prices in the three months to May were 5.2% higher than in the same three months a year earlier.

May’s annual change figure of 5.2% comes against the backdrop of a particularly low growth rate in the corresponding period in 2018, which has had an impact on year-on-year comparisons.

Russell Galley, Managing Director, Halifax, said:

“We saw a slight increase in house prices between April and May, but the overall message is one of stability. Despite the ongoing political and economic uncertainty, underlying conditions in the broader economy continue to underpin the housing market, particularly the twin factors of high employment and low interest rates".

National Institute of Statistics and Economic Studies (Insee) said, in April 2019, output was virtually stable in the manufacturing industry (after -1.1% in March). It increased in the whole industry (+0.4%, after −1.1%). Economists had expected a 0.3% increase in the whole industry.

Manufacturing output increased over the last three months (+1.0%), as well as in the whole industry (+0.7%).

Over the last three months, output kept growing in “other manufacturing” (+0.9%), in the manufacture of machinery and equipment goods (+3.1%) and in the manufacture of coke and refined petroleum products (+3.0%). It increased slightly in the manufacture of food products and beverages (+0.2%). Conversely, it decreased in mining and quarrying, energy, water supply (−0.9%) and in the manufacture of transport equipment (−0.3%).

Manufacturing output of the last three months increased compared to the same three months a year ago (+1.3%), as well as in the whole industry (+0.4%).

Over a year, output of the last three months increased sharply in the manufacture of transport equipment (+4.1%), in the manufacture of machinery and equipment goods (+3.3%) in the manufacture of coke and refined petroleum products (+2.1%), and more moderately in “other manufacturing” (+0.6%). On the contrary, it decreased strongly in mining and quarrying, energy, water supply (−4.7%) and more moderately in the manufacture of food products and beverages (−0.6%).

The importance of new targeted longer-term refinancing operations (TLTRO) is that they keep favourable financing for banks, ECB governing council member Bostjan Vasle said on Friday.

"The instrument keeps favourable conditions of financing for banks and thus supports transmission of monetary policy into banks' credit activity," Vasle said in a statement.

• 2020 GDP forecast at 1.2% (1.6% previously)

• 2019 inflation forecast at 1.4% (unchanged)

• 2020 inflation forecast 1.5% (1.8% previously)

• Economy is expected to experience a slight decrease in Q2 but real GDP is likely to pick up again somewhat in Q3.

• German exports is expected to start rising in the second half of the year with the prospect of a more protracted and clear decline in economic output seemingly unlikely.

In their latest outlook report on the Bank of Japan (BOJ) monetary policy, the analysts at JP Morgan expect the Japanese central bank to cut the benchmark interest rates this September.

“We now expect a 20bp rate cut in September. Expect a cut in the short-term policy rate from -0.1l% to -0.3% in September against the risk of financial tightening after the expected Fed rate cut. If the US-China trade negotiations collapse and equity prices plunge, the BOJ may increase the amount of ETF purchases in July.”

According to provisional data from Destatis, Germany exported goods to the value of 109.7 billion euros and imported goods to the value of 91.7 billion euros in April 2019. German exports declined by 0.5%, while imports increased by 2.1% in April 2019 year on year. After calendar and seasonal adjustment, exports were down 3.7% and imports 1.3% compared with March 2019.

The foreign trade balance showed a surplus of 17.9 billion euros in April 2019. In April 2018, the surplus amounted to 20.4 billion euros. In calendar and seasonally adjusted terms, the foreign trade balance recorded a surplus of 17.0 billion euros in April 2019.

According to provisional results of the Deutsche Bundesbank, the current account of the balance of payments showed a surplus of 22.6 billion euros in April 2019, which takes into account the balances of trade in goods including supplementary trade items (+19.2 billion euros), services (-0.7 billion euros), primary income (+7.6 billion euros) and secondary income (-3.6 billion euros). In April 2018, the German current account showed a surplus of 22.7 billion euros.

According to provisional data of the Federal Statistical Office (Destatis), in April 2019, production in industry was down by 1.9% on the previous month on a price, seasonally and calendar adjusted basis. Economists had expected a 0.3% decrease.

In March 2019, the corrected figure shows an increase of 0.5% from February 2019, thus confirming the provisional result published in the previous month.

In April 2019, production in industry excluding energy and construction was down by 2.5%. Within industry, the production of intermediate goods decreased by 2.1% and the production of consumer goods by 0.8%. The production of capital goods showed a decrease by 3.3%. Outside industry, energy production was down by 1.1% in April 2019 and the production in construction increased by 0.2%.

EUR/USD

Resistance levels (open interest**, contracts)

$1.1356 (5006)

$1.1317 (5388)

$1.1292 (3055)

Price at time of writing this review: $1.1266

Support levels (open interest**, contracts):

$1.1239 (4075)

$1.1196 (4812)

$1.1149 (3222)

Comments:

- Overall open interest on the CALL options and PUT options with the expiration date June, 7 is 125749 contracts (according to data from June, 6) with the maximum number of contracts with strike price $1,1500 (9140);

GBP/USD

Resistance levels (open interest**, contracts)

$1.2851 (338)

$1.2801 (846)

$1.2754 (1188)

Price at time of writing this review: $1.2693

Support levels (open interest**, contracts):

$1.2643 (1596)

$1.2598 (1989)

$1.2549 (827)

Comments:

- Overall open interest on the CALL options with the expiration date June, 7 is 42892 contracts, with the maximum number of contracts with strike price $1,3450 (3277);

- Overall open interest on the PUT options with the expiration date June, 7 is 38986 contracts, with the maximum number of contracts with strike price $1,2800 (3616);

- The ratio of PUT/CALL was 0.91 versus 0.93 from the previous trading day according to data from June, 6

* - The Chicago Mercantile Exchange bulletin (CME) is used for the calculation.

** - Open interest takes into account the total number of option contracts that are open at the moment.