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ECONOMIC DATA ANALYSIS - US EMPLOYMENT REPORT TO TAKE CENTRE-STAGE
ECONOMIC DATA ANALYSIS FRIDAY 31 MAY 2013
US EMPLOYMENT REPORT TO TAKE CENTRE-STAGE
• US bond yields post sharpest monthly rise for 2 1/2 years
• US Employment Report to take centre-stage, as market eyes prospects for Fed ‘tapering’
• Governor King chairs his last MPC meeting; ECB also meet. No change expected from either
Despite a dearth of key economic data, it has been another febrile week for financial markets. After last week’s substantial losses, the major equity indices have see-sawed, but moved generally lower, while bond yields have ratcheted higher. The latest increase takes the cumulative rise in yield on the US 10-yr Treasury benchmark is over 40bp since the beginning of May - its largest one-month increase since December 2010.
The economic calendar steps up substantially in the coming week, with a number of key data releases and events that could shape market sentiment for much of June. Globally, the May US Employment Report (Fri) takes centre stage. The surprise strength in last month’s employment report was the primary catalyst for the recent rise in global bond yields.
With Fed Chairman Bernanke tying the prospects for US monetary policy inextricably to the performance of the US economy, especially the labour market, the report will take on even greater importance than usual. US non-farm payrolls outcomes are notoriously volatile. The average monthly deviation from consensus since 2005 has been 64k. With the May consensus estimate unchanged from last month, at 165k, there is a substantial possibility of a surprise. Our forecast is somewhat firmer at 183k. Although jobless claims posted a surprise rise this week (to 354k), prior weeks that overlap the payroll survey period were more upbeat. Moreover, the employment component of the April non-manufacturing ISM points to upside risks.
It is not only the US Employment Report, however, that has scope to generate near-term volatility. The US ISM manufacturing and nonmanufacturing surveys for May will offer important insights into how the economy is faring in Q2. Assuming further improvements in business activity and confidence, market
conviction that the Fed is likely to start withdrawing policy stimulus in September will inevitably intensify.
It is also a busy week for data and events in Europe. Both the ECB and MPC meet for their monthly policy meetings. Although we expect the ECB to keep the refinancing rate unchanged, continued weak economic data across the region
suggest the risks of a further cut over the summer are building. President Draghi’s press conference will be watched closely for any hints of impending action or otherwise, amid a recent agreement by the EU to soften fiscal austerity.
After 193 MPC meetings, the June meeting will be Mervyn King’s last before he hands over the reins to Mark Carney. UK data over the past month has been mixed, with signs of a softening in the labour market, and a sharp fall in April retail sales and inflation, counterbalanced by improvements in consumer and business confidence. Given this, we believe there is little reason for MPC members to change their positions from last month, with the vote to keep policy unchanged expected to remain at 6-3 for the fifth consecutive month. Mark Carney’s arrival in July is now eagerly awaited to see whether the bias on the Committee shifts.
The latest PMIs are also released across Europe. The euro area PMIs are mostly final estimates for May. They are likely to confirm the improvement in the ‘flash’ estimates, albeit from a still very weak base. While the euro area continues to face formidable challenges, the economic outlook in the UK appears to be improving. We expect this to be reflected in further improvements in the UK PMIs (see back page for more data analysis).
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