HomeContributorsTechnical AnalysisUS Employment Report, Eurozone Inflation Prints, Other Key Data in Focus

US Employment Report, Eurozone Inflation Prints, Other Key Data in Focus

Next week’s market movers

  • In the US, the final employment report before the Fed’s June meeting could add the finishing touch to market expectations regarding a hike at that gathering.
  • In Eurozone, CPI data for May will be in the spotlight, amid heightened speculation regarding an increasingly more optimistic tone by the ECB at one of its upcoming meetings.
  • We also get key economic data from Germany, the UK, and the US.

On Monday, we have no major events or indicators on the economic agenda. Markets will remain closed in the US, the UK, and China.

On Tuesday, we get Germany’s preliminary CPI data for May, just one day ahead of Eurozone’s. The forecast is for the nation’s inflation rate to have declined notably. We see the risks surrounding that forecast as skewed to the upside, perhaps for a smaller-than-anticipated decline, considering that the preliminary Markit composite PMI for the month showed that German businesses raised their prices at one of the steepest rates in six years. In case Germany’s CPI rate surprises to the upside, it could raise some speculation for a positive surprise in the bloc’s print as well.

From the US, we get personal income and spending data, all for April. The forecast is for both the income and the spending rates to have risen from the previous month. The income forecast is supported by a similar increase in the average hourly earnings rate for the same month. Meanwhile, the spending forecast is somewhat supported by the rebound in retail sales during the month. Bearing in mind that the FOMC May meeting minutes showed that policymakers want to see evidence that GDP growth rebounded in Q2 before hiking again, we think that investors will focus primarily on the spending print, as consumption is by far the largest component of US GDP.

Staying in the US, we also get the core PCE price index for April, though no forecast is available yet. We see the case for the rate to have remained unchanged, with risks tilted to the downside. We base that view on the unexpected decline in the core CPI rate for the month, as well as the nation’s Markit services PMI, which showed that service providers raised their prices at the slowest rate for five months.

On Wednesday, Eurozone’s preliminary CPI figures for May will capture market attention. The forecast is for both the headline and the core rates to have declined. We view the risks surrounding these forecasts as tilted to the upside, given that the bloc’s preliminary composite PMI for May showed that firms raised their selling prices at the second fastest pace since 2011. Considering that these will be the last inflation prints before the ECB’s June meeting, we expect them to attract even more attention than usual, amid elevated speculation regarding the prospect of a more optimistic tone by the ECB. Indeed, the bloc’s economic data are improving rapidly, adding credibility to that scenario. Inflationary pressures are picking up overall, GDP growth is strong and the unemployment rate has been declining steadily. Thus, we agree that the Bank could begin to change its forward guidance and signal that the risks surrounding growth are no longer tilted to the downside, but are instead close to balanced. The minutes of the May ECB gathering already showed that "some members" considered the risks to GDP as broadly balanced, which suggests that a change in language may be on the cards as early as at the June meeting.

On Thursday, from the US, we get the ADP employment report as well as the ISM manufacturing PMI, both for May. Kicking off with the jobs data, the consensus is for the private sector to have added 185k jobs, slightly more than April’s print of 177k. In case the ADP figure meets or exceeds its forecast, we could see increased speculation for the nonfarm payrolls print to also meet its forecast of 183k.

As for the ISM manufacturing index, the forecast is for the figure to have declined marginally, but to still remain safely above the critical 50 mark that separates expansion from contraction in the sector. The case for a modest tumble in this print is supported by a similar decline in the Markit manufacturing index for May, which fell to an 8-month low, dragged lower by softer output, new orders and employment growth.

From the UK, we get the manufacturing PMI for May and then on Friday, we will get the construction index for the month. The forecast is for both of these indices to have declined, though such a decline would still leave the manufacturing index at a very elevated level. Even though these will likely give the first picture of how the UK economy performed in May, we think that investors may prefer to wait for the services index that will be released the following week before making their overall assessment. The service sector accounts for the vast majority of UK GDP. In addition, we think that over the next couple of weeks, UK political developments are likely to overshadow economics, bearing in mind the looming General Election. In this respect, we expect incoming polls to attract a lot of market attention. The risk here for sterling would be any new polls that show Labour catching up with the Conservatives, as that could amplify speculation that Theresa May could fail to secure the strong majority she is seeking in Parliament.

On Friday, all eyes will be on the US employment report for May. The forecast is for nonfarm payrolls to have risen by 183k, less than the 211k in April, but still a solid number that is consistent with further tightening in the labor market. The unemployment rate is expected to have ticked up while average hourly earnings are anticipated to have slowed somewhat in monthly terms, though that would leave the yearly rate unchanged at +2.5% yoy. Despite some potential softness in the unemployment rate and earnings, we think that overall, this is likely to be seen as a decent report by FOMC officials. An uptick in the unemployment rate would leave it at 4.5%, which is still consistent with the FOMC’s estimation of full employment, suggesting that such an uptick is unlikely to be particularly worrisome for the Fed. As for earnings, we doubt that this will be a game-changer for policymakers either.

At the time of writing, the probability for a June rate hike is 83% according to the Fed funds futures, implying that as far as the market is concerned, it is almost a done deal. As such, we think that the risks surrounding the dollar from monetary policy over the coming two weeks may be asymmetrical and tilted to the downside. In case we get strong data consistent with the Fed raising rates, we could see that probability climb a bit higher towards 100% ahead of the meeting. However, any serious disappointment in economic indicators could lead to a significant re-pricing of that probability. In this respect, it is critical to remember that in the FOMC May meeting minutes, policymakers signaled they want to see evidence that the recent slowdown in economic activity was indeed transitory before taking any further action, something that is not clear yet in our view.

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