FINANCIAL NEWS HIGHLIGHTS OF THE WEEK
- Sparse economic data this week has left market participants dwelling on last Friday’s very weak jobs report.
- Chair Yellen’s speech on Monday did not reiterate the previously used phrase that the FOMC is considering a rate hike ‘in the coming months’, leaving markets confident that the Fed is in no rush to raise rates at this point.
- A slew of domestic data next week, along with the new Fed projections, will provide markets with more to chew on as investors try to get a better read on the broader economic outlook.
PAYROLLS REPORT CONTINUES REVERBARATE THROUGH MARKETS
Last Friday’s flop of a jobs report continued to send jitters through markets this week with investors focused on Chair Yellen’s Monday speech at the World Affairs Council in Philadelphia. Despite the prospects for any Fed action at its meeting next week largely snuffed out by the May employment report, investors still hoped for clues from the Fed Chair.
The speech was mostly dovish, expressing concern over Friday’s disappointing report and failing to reiterate a previously used phrase that the FOMC is considering a rate hike ‘in the coming months.’ Still, the Fed Chair noted that the economic positives outweigh the negatives and that one can’t put too much emphasis on a single number. She also pointed to a rebound in consumer spending and a falling number of people filing new unemployment insurance claims as positive signs.
These trends were further corroborated this week, assuaging some fears of weakening momentum. Initial claims fell to a mere 264k, beating consensus for a rise to 270k, and marking the fourth consecutive decline off its near-300k recent high in early May. Consumer confidence also held up in June, according to the University of Michigan survey, with the current condition sub-index particularly strong.
Global economic data, also painted a mixed picture. German factory orders declined by a sharp 2.0% in April and unwound most of the prior month’s 2.6% rise. Meanwhile, UK industrial production for April surprised sharply to the upside surging by 2% m/m against expectations for flat growth. The value of total exports also rose by 5.3% m/m, the strongest advance since early-2010, while goods exports climbed by an even stronger 9.1%. Nonetheless, this backward looking data out of the UK did little to sway concerns over the looming UK referendum that is less than two weeks away.
After last week’s strong rally, markets remained largely flat through the end of the week, with the S&P 500 little changed from the previous week’s close, at the time of writing. The downbeat sentiment from the payroll report carried into this week and alongside rising uncertainty surrounding the Brexit vote put a strong bid under very safe bonds, with the 10-year U.S. Treasury yield falling nearly 10 basis points by the end of the week to just 1.65%.
Looking forward to next week’s FOMC meeting, the market appears confident that rates will remain unchanged with the data-dependent Fed unlikely to ignore the recent labor market report, putting them in wait-and-see mode as they seek more evidence in support of a strengthening domestic economy. Whether the sharply reduced pace of hiring is due to a persistent slowdown in the broader economy, a temporary blip in the data, or marks a deceleration to a pace more consistent with fundamentals as cyclical factors wane remains top of mind. Next week’s slew of data, which includes retail sales, housing starts and inflation, should shed some light on this debate. Alongside a new set of projections from the Fed and a press conference with Chair Yellen, this data should allow market participants to further glean how the recovery is progressing, and get a better sense of the likelihood of a summertime rate hike – something we believe remains very likely.
Neil Shankar, Economist
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