It's a fairly quiet week in the U.S.. On Friday, we saw the U.S. economy added 217,000 nonfarm payrolls in May, while the unemployment rate held steady at 6.3%.
All eyes will now turn to the retail sales report for confirmation of an economic snapback.
We also have three Fed speeches on Monday. St. Louis Federal Reserve president James Bullard will speak on the economy and monetary policy in Florida.
Boston Federal president, Eric Rosengreen, is slated to speak on monetary policy in Guatemala.
Finally, Fed Gov. Daniel Tarullo will speak on corporate governance in Washington.
Here's your Monday Scouting Report:
Top Story
- Winter Weakness: Following the modest beat in the May jobs report, Paul Ashworth at Capital Economics wrote that those who attributed the economic weakness in the first quarter to the unusually harsh winter, have won the argument. "The robust 217,000 increase in non-far payrolls in May is another illustration that the economy is back on the right track after the weather-related weakness during the winter," Ashworth wrote. "May's gain followed an even stronger 282,000 increase in April, although we suspect that the latter was boosted a little by the unwinding of the earlier weather distortion."
- Rise Of Investor Complacency: Despite the European Central Bank’s move to push rates into negative territory on Thursday, investors were disappointed. “Markets expect a lot from central banks these days, and despite a comprehensive set of measures from Mr. Draghi, traders sniffed at the absence of QE,” writes Claus Vistesen at Pantheon Macroeconomics. “Such over-expectancy on the part of investors is a sign of complacency.” Vistesen writes that talk of a ‘great moderation’ has returned as low volatility has raised hopes of “a return to bull markets and rapid growth.”
- The Changing Face Of The FOMC: All eyes are now on the three new members voting at the June FOMC meeting. “This change-over will add some uncertainty to the policy debate and the distribution of the June ‘dot plot,’ writes Michael Hanson at Bank of America Merrill Lynch. The dot plot refers to the chart that shows the predicted path of the federal funds rate. “…However, we don’t expect these current or potential future personnel changes to fundamentally alter the majority support for a gradual exit with rates below their historical average for some time."
Economic Calendar
- Treasury budget (Wed): Economists are looking for a $130 billion deficit in May. This compared to a $106.9 billion surplus in April.
- Initial Jobless Claims (Thurs): Economists expect initial claims fell to 309,000, from 312,000 in the May 31 week. "It appears that the extended period of extreme week-to-week volatility may be over,” write economists at Citi. “Importantly, the four-week moving average is settling into a new lower range after several months near 320K.”
- Retail sales (Thurs): Economists estimate that retail sales will rise 0.6% month-over-month in May, compared to a 0.1% rise the previous month. Meanwhile, core retail sales (ex-auto and gas) are expected to rise 0.4% MoM, following a 0.1% fall in April. "Higher spending on general merchandise and higher cost on health insurance due to the Affordable Care Act are likely to be key sources of the gain in this month," according to the economists at TD Securities. "We expect this report to reinforce the current constructive narrative on the economic recovery, pointing to further positive momentum in household spending—consistent with the rebound seen in household sentiment and labor market activity in recent months."
- Business inventories (Thurs): Economists expect business inventories to climb 0.4% on the month in April, following a 0.4% rise in March. “Manufacturers’ inventories have already been reported as rising, but the recent surprisingly strong import growth suggests larger increases for retail and wholesale inventories,” write economists at Citi. “Note: The large import surge in April suggests that retailers and wholesalers believed that consumer demand would pick up sharply after being cooled by the weather all winter.”
- PPI (Fri): Economists are looking for produce prices to rise 0.1% on the month in May, compared with a 0.6% rise in April. Meanwhile, core producer prices (ex-food and energy) 0.1% on the month, compared to a 0.5% rise the previous month.
- Consumer sentiment (Fri): Economists are looking for University of Michigan consumer confidence to rise to 83 in June, from 81.9 the previous month. "Underlying our forecast are equity markets, which have moved higher and experienced reduced volatility relative to May, as well as initial jobless claims, which have been grinding lower in recent weeks," write Barclays economists.
Market Commentary
U.S. stocks ended higher with the Dow and S&P 500 hitting new record highs on Friday. "In line with the recent trend, this week’s push higher lacked a specific catalyst. However, while the macro narrative remained little changed, there were several positive dynamics at work,” according to the folks at FactSet.
One of those would be the European Central Bank's historic rate cut, which made it the first major central bank to push rates into negative territory. The ECB also announced a string of easing measures.
"While there were no meaningful surprises out of this week's sell-side conferences, there seemed to be more focus on the pickup in earnings growth coming out of Q1. Strategists also continued to highlight improved earnings revision trends,” according to FactSet.
Meanwhile, Brian Belski at BMO Capital Markets writes that falling rates are not signaling a weaker economy. “The recent divergence between Treasury yields and stock prices has some investors nervous based on our client conversations,” writes Belski. “The predominant line of thinking is that lower rates portend softer economic growth. However, we believe these investors may be over-emphasizing the significance of the recent decoupling.”
"Based on our work, periods of interest rate and stock price decoupling are fairly common and most of the time stocks “get it right.” In addition, the recent drop in rates appears to be more technical in nature from our lens given that trends in important economic indicators have improved significantly since the start of the year."
For more insight about the middle market, visit mid-marketpulse.com.