Just about an hour before the US non-farm payroll number is expected to print, and finally resolve the lingering question whether the Chairman will print in 3 weeks, things in Europe have gone from horrible to zombie. A series of horrendous economic reports out of Europe including record Eurozone unemployment, a confirmation of the final European PMI plunge including the second largest monthly decline on record in UK manufacturing, and various soundbites from Syriza's Tsipras, have pushed the EUR to fresh two year lows, Spanish CDS to new all time wides...
...German 2 Year bonds joining Switzerland in negative terriroty, and finally, Bloomberg, as noted earlier, to be "testing" a placeholder for a post-Euro Drachma. As BBG summarizes: "European markets fall, led by consumer & tech stocks with the German market underperforming. The euro falls against the dollar and German 2-yr yields drop into negative territory. Chinese manufacturing PMI data below expectations, though above the 50 level; European manufacturing PMI in line with expectations, below 50. Euro-zone unemployment met expectations and seems likely Irish voters endorsed the EU fiscal treaty. Commodities fall, led by oil & natural gas. U.S. nonfarm payrolls, unemployment data due later." In summary - all data today fits with Raoul Pal's less than optimistic presentation from yesterday.
Summary from BofA
In focus
Markets are increasingly worried about the situation in Europe. Real yields on safe havens such as US Treasuries, German bunds and UK gilts are all negative. Investors appear more concerned about getting their principal back then making a return on their money. Today's US employment report could further increase negative sentiment among investors. The market is looking for +150,000 for today's NFP figure but we are below consensus at 140,000. A bad report could send markets swooning while a strong report might renew investor hope that the US can drive global growth. We are skeptical of the US driving global growth. Our expectations are that the fiscal cliff looming at the start of 2013 will slow growth throughout the rest of this year. To read more about the fiscal cliffhanger see: US Economic Viewpoint, 30 May 2012.
Market action
More signs that the uncertainty stemming from the Euro crisis is weighing on investor sentiment. Investors are getting less bullish on stocks according to our US Equity Strategy team's Sell Side Indicator. After triggering a Buy signal last month, their measure of Wall Street bullishness on stocks declined again, marking the eighth time in ten months that the indicator has fallen. The 4.0pp decline pushed the indicator down to 50.2, its lowest level in nearly 15 years, suggesting that sell side strategists are now more bearish on equities than they were at any point during the collapse of the Tech Bubble or the recent Financial Crisis.
In Asian most equity markets finished lower with the regional MSCI Asia Pacific index shedding 1%. Japan's Nikkei lost 1.2% and the Indian Sensex slid 1.7%. The Korean Kospi fell 0.5% and the Hang Seng lost 0.4%. On the flip side the Shanghai Composite managed to finish 0.1% higher. Investors there are hoping that the weak manufacturing PMI will awaken policymakers to the country's slowdown and result in growth enhancing measures.
European equities continue to slide as worries over Spain, Greece and the future of the euro area weigh on investor sentiment. Until investors see a concrete solution to the problems plaguing the euro area, the region's equities are likely going to continue falling. In the aggregate, European equities are down 1.2%. At home, equities are set to tumble. Futures on the S&P 500 are pointing to a 1.3% lower open today.
In bondland, Treasuries are bid with the five year down 1bp, the 10-year down 2bp and the long bond down 3bp. Currently the 10-year yield is trading at 1.54%. Europe's safe havens are also bid with the German bund down 3bp to 1.16% and the UK gilt down 6bp to 1.51%.
The dollar, another safe haven, is bid as well. The DXY index is up 0.3%. Commodity prices are lower due to the dollar’s strength. WTI crude oil is $1.50 a barrel lower. Gold is beginning to lose some of its luster as a safe haven for investors. Today the yellow metal is down $7.55 an ounce to $1,552.92. Since September, gold is down over $347 an ounce.
Today’s events
The economic calendar is crowded today. Kicking things off will be the May employment report at 8:30 am. We expect non-farm payrolls to increase 140,000 in May, leaving the three month moving average to slow to 128,000. To read a full preview see the Payroll Preview section below.
Also at 8:30 am, we have the April personal income and outlay report. We expect personal income and spending to increase 0.2% in April. Job growth was sluggish in April and wages were flat, which does not bode well for compensation growth. On the spending side, core retail sales increased 0.4% but auto sales slipped lower. Moreover, a decrease in prices should translate to slower nominal spending. We look for headline PCE to decline 0.16% in April, leaving real consumer spending up 0.3%.
At 10:00 am, we have the April construction spending report and the May ISM manufacturing survey. Construction spending is likely to increase 0.6% in April, following a 0.1% increase in March. Meanwhile, we expect the ISM Manufacturing Index to moderate to 53.5 in May from 54.8 in April.
Throughout the day, vehicle manufacturers will be reporting on their May vehicle sales. In our view, vehicle sales are likely to reach a seasonally adjusted annualized selling rate of 14.3 million units in May.
Payroll preview
We expect non-farm payrolls to increase 140,000 in May, leaving the three month moving average to slow to 128,000. This is a marked deceleration from the three month average gain of 252,000 from December through February. As we have been arguing for some time, we believe this swing can largely be explained by the abnormally warm weather in the winter. This is obvious in construction jobs, but other sectors such as leisure/hospitality and retail trade exhibited some seasonal volatility. We suspect that job growth in these three sectors will remain soft in May. We expect the government to shed 10,000 jobs in May as state and local governments as well as the federal government continue to reduce headcount. This means private payrolls will be up 150,000.
The household survey, which provides the estimate for the unemployment rate, has been particularly noisy lately. Starting in the fall of last year through February, the household survey showed job gains of an average of 385,000 a month. Despite these gains, the participation rate continued to edge lower, pushing down the unemployment rate. Job growth started to reverse in March, with a contraction in both March and April. While we do not expect another decline in jobs in April, the household measure of employment is likely to look soft. In addition, the labor force participation rate could tick up modestly to reverse some of the recent sharp declines. This would push the unemployment rate up to 8.2% from 8.1% last month (unrounded last month 8.098%).
With slow job growth and high unemployment, we expect wages to remain soft. We forecast average hourly earnings to only increase 0.1% mom in May after unchanged earnings in April. This would translate to a tepid 1.7% yoy gain. We expect the workweek to hold at 34.5 in May. The good news for payrolls is that hours worked have returned to pre-recession levels, which means that businesses can no longer rely on increasing hours of the current workforce to meet greater demand; they will have to hire. Businesses have responded by hiring a disproportionate number of temporary and part-time workers, reflecting the uncertain nature of this recovery.