EUR/AUD's break of 1.4927 support last week confirmed short term topping at 1.5226, on bearish divergence condition in 4 hour MACD. Deeper decline could be seen initial this week for 38.2% retracement of 1.3980 to 1.5226 at 1.4750 as the correction continues. At this point, we'd expect strong support from 1.4669 to contain downside and bring rebound. Above 1.5015 minor resistance will turn bias to the upside for 1.5226 first. Break will target next medium term fibonacci level at 1.5455.

In the bigger picture, price actions from 1.6587 medium term top are viewed as a corrective pattern. Such correction should be completed at 1.3624 after defending 1.3671 key support. Rise from 1.3642 is now expected to target 61.8% retracement of 1.6587 to 1.3624 at 1.5455. Sustained break there will pave the way to retest 1.6587. In any case, outlook will now stay cautiously bullish as long as 1.4669 support holds. Break of 1.4669 will dampen the bullish view and would at least bring deeper fall back to 55 week EMA (now at 1.4539).

In the longer term picture, the rise from 1.1602 long term bottom isn't over yet. We'll keep monitoring the development but there is prospect of extending the rise to 61.8% retracement of 2.1127 to 1.1602 at 1.7488 and above. However, sustained trading below 1.3671 should confirm trend reversal and target 1.1602 long term bottom again.

EUR/CHF's fall from 1.0986 extended lower last week but overall outlook is unchanged. Such decline is seen as a correction. While deeper fall cannot be ruled out, downside should be contained by 1.0791/0872 support zone, probably around 55 day EMA (now at 1.0830) to bring rebound. Rise from 1.0629 is expected to resume later. Above 1.0902 minor resistance will turn bias back to the upside for 1.0986/0999.

In the bigger picture, the price actions from 1.1198 are seen as a corrective move. Such correction could have completed after defending 38.2% retracement of 0.9771 to 1.1198 at 1.0653. Decisive break of 1.0999 resistance will target a test on 1.1198 high. For now, this will be the preferred case as long as 1.0791 support holds.

Sterling ended last week as the weakest major currency. The Conservatives' losing of majority in the parliament created much uncertainty on politics, economic policies and Brexit negotiation. While the selloff in the Pound was steep, it's so far holding on to key support level against Dollar, Euro and Swiss Franc. And it seems like traders are still holding some of their bets to watch the developments in near term. Euro ended as the second weakest major currency for the week as traders were not satisfied with the tiny hawkish move in ECB's language. And the general weakness in European majors also dragged the Swiss Franc.

While the anticipation on former FBI Director James Comey's testimony was high, the reactions were quite muted. It looked like the markets have finally moved on with the issue while Dollar and yields were ready for a rebound. But then the steep selloff in NASDAQ on Friday reversed much of the gains in Dollar index and yields. The greenback ended as the forth weakest major currency. Commodity currencies were the strongest ones with Aussie and Kiwi leading the way. But to us, it's the resilience of Canadian Dollar, with the background of sharp decline in oil price, that was more impressive.

Markets will continue to keep an eye on the development in UK for sure. In addition, four central banks will meet this week including Fed, SNB, BoE and BoJ.

Political uncertainty to persist in UK

After the election backslash, Minister Theresa May vowed to hand on as the Prime Minister and was preparing to form a minority government with Northern Ireland's Democratic Unionist Party. But it remains uncertain for how long May can stay. Her co-chiefs of staff Nick Timothy and Fiona Hill resigned on Saturday for the failure of the election campaign. But that seems to be insufficient for some MPs as there were still reports of calls for May's resignation. The MPs are particularly unhappy with May's manifesto and named that as the turning point of the campaign. In addition, there were also criticism on the alliance with the socially conservative DUP on the latter's anti LGBTI stance. Even if May is staying on, there are so far little clues on how she's going to shake up her administration. May only said on Friday that she would retain five key Cabinet ministers.

Brexit negotiation to start on June 19, but how?

Any information regarding Brexit negotiation will also be closely watched this week. Formally, the negotiation is scheduled to start on June 19. It's believed that it will still start on the date. Europeans officials have already make themselves clear that they are ready. German Chancellor Angela Merkel said that "we are preparing for Brexit" and "we are going to defend the interests of the 27 countries which will be in the EU in the future". And, "I understand that the UK is going to respect the timetable. We want to do it fast, respecting the time table."

Other Sterling risks on CPI and BoE voting

BoE meeting is a key event in UK next week, it is generally expected that the main policy rate will be held at 0.25% while the asset purchase target kept at GBP 435b. The voting will be the main focus. In particular, markets would like to see if Kristin Forbes would continue to vote for a rate hike. And head of the meeting, UK will also release CPI, employment and retail sales. Headline CPI is expected to be unchanged at 2.7% yoy in May and a surprise there might change Forbes' mind.

Technically, GBP/USD is holding on to 1.2614 key near term support for the moment. EUR/GBP breached 0.8851 resistance briefly but closed well below at 0.8878. GBP/CHF dropped to as low as 1.2247 but recovered to close at 1.2344. We're preferring the case that corrective rise from 1.1635 has completed with three waves up to 1.3067 already. Break of 1.2213 key support level should confirm our bearish view. In such case, larger down trend from 1.5570 will be resuming for a new low below 1.1635. However, strong rebound from 1.2213 and break of 1.2537 near term resistance will dampen our view and extend the corrective pattern from 1.1635 with another rise.

Markets unhappy with ECB's tiny step

ECB kept key interest rate at 0% and deposit rate at -0.4% last week as widely expected. Asset purchase is held at EUR 60b per month, run through December this year. President Mario Draghi said risks to outlook are now "broadly balanced" as the Eurozone is enjoying "stronger momentum" as a "somewhat faster pace than previously expected. Nonetheless, he maintained that substantial degree of monetary accommodation is still needed.

And with that in consideration, ECB did a tiny step and closed the door for further rate cut. It noted in the statement that "the Governing Council expects the key ECB interest rates to remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases." Previously ECB said that "... at present or lower levels... ". However, ECB maintained the open door for extending the asset purchase program as it noted that "net asset purchases, at the new monthly pace of €60 billion, are intended to run until the end of December 2017, or beyond, if necessary."

Inflation forecast revised lower, growth projections upgraded

Meanwhile, the latest staff economic projections showed downward revision to inflation forecasts. ECB now projections CPI to be at 1.5% in 2017, 1.3% in 2018 and 1.6% in 2019. That compared to prior forecasts of 1.7% , 1.6% and 1.7% respectively. Draghi said that was mainly because of lower oil prices. On the other hand, growth projections are revised higher. ECB now forecasts GDP growth to be at 1.9% in 2017, 1.8% in 2018 and 1.7% in 2019. That compares to prior 1.8%, 1.7% and 1.7% respectively.

Euro holds on to near term support levels

Euro bulls were clearly unhappy with the announcements. EUR/USD struggled to find buying to break through 1.1298 key resistance and closed lower at 1.1194. Nonetheless, it's maintaining bullish outlook by staying above 1.1109 support. EUR/JPY also extended recent consolidation from 125.80 but holds above 121.61 near term fibonacci level so far. EUR/AUD also suffered deep pull back through 1.4927 near term support. But EUR/AUD is also maintaining bullish outlook by holding above 1.4669 support. EUR/CAD also lost much momentum after hitting 1.5257 and faced much resistance from 1.5279. Some more consolidations would be seen in near term. But outlook will stay bullish for another rise as long as 1.4823. Hence, overall, Euro is now is in a consolidation phase and more upside is expected at a later stage.

Fed to hike and release new economic projections

Markets generally shrugged off Comey's testimony as no "smoking gun" for US President Donald Trump was found. Focus will now turn to FOMC rate decision. Fed is still widely expected to raise the target range to 1.00-1.25%. Fed fund futures are pricing in 99.6% chance of that. It should be noted that the base case of many Fed officials and economists is for Fed to hike a total of three times this year, followed by the start to shrink the balance sheet. However, recent weakness in inflation and job data triggered some talks that the economy might not be able to withstand three hikes this year. This week's FOMC meeting will bare additional significance of release of new economic projections and a press conference. Markets will scrutinize the new information to see if Fed officials have changed their mind. To us, risks are more skewed to the downside for the greenback.

NASDAQ tumbled sharply

Developments in stocks and yields will also be watched. DOW climbed to record close at 21271.97 last week. But NASDAQ tumbled sharply on Friday, by -1.8% to close at 6207.92, way off the day high at 6341.70. The so-called "Big Five", Apple, Alphabet, Microsoft, Facebook and Amazon lost nearly $100b in market value. Some blamed the selloff on sector rotation. But it remains to be seen if it's development into a correction of a longer term. 55 day EMA at 6063.85 is a key level to watch. Rebound from there will keep index inside medium term rising channel and maintains the trend. But a strong break there would open up deep pull back to 5842 fibonacci support.

10 year yield lacks momentum for rebound

The developments in 10 year yield and dollar index are also worth a mention. TNX dipped to 2.133 last week but tried to draw support from 38.2% retracement of 1.336 to 2.621 at 2.130 and recovered. Daily MACD also points to "possible" bullish convergence. But TNX lost upside momentum after hitting 2.229 and has clearly followed NASDAQ lower. It's also kept well below 2.297 near term resistance and thus maintained near term bearish outlook. Further selloff in US stocks this week will drag down TNX and put focus back to 2.130. Break there would likely push TNX further lower to 2.000 handle, which is close to 50% retracement at 1.978.

Dollar index also lacks momentum

A similar picture is seen in Dollar index as DXY edged lower to 96.51 but tried to draw support from 61.8% retracement of 91.91 to 103.82 at 96.46 and recovered. Upside momentum has been very week so far and there is no clear sign of reversal yet. 97.77 is the first hurdle but the real test would lie in 55 day EMA at 98.55. We've pointed out the risk that fall from 103.82 is developing into a medium term correction. And sustained break of 96.46 will pave the way for 91.91 key support next. And when that happens, it would be accompanied by EUR/USD's break of 1.1298 key resistance which would trigger accelerating selling in Dollar. Hence, overall, there is prospect of a reversal in Dollar if stocks would stabilize, yield and Dollar index can build up more momentum. But over risk is much more on the downside for the greenback. FOMC meeting could be the key.

Hold USD/CAD short, buy EUR/GBP on dip

Regarding trading strategy, we're holding on to USD/CAD short (sold at 1.3510). Consolidation from 1.3387 extended with another recovery last week. But upside was limited at 1.3537, below our stop at 1.3550. We're holding on to the bearish view that fall from 1.3793 would extend to 1.3222 support as our first target, and deeper in medium term. Hence, we'll hold on to USD/CAD short, with stop unchanged at 1.3550.

USD/JPY dropped to as low as 109.11 last week but recovered since then. Our sell USD/JPY at 110.80 was not filled and we will cancel this order first. We're expecting Sterling to be troubled by on-going political uncertainty. The refrained selloff last week is seen as a opportunity to sell the Pound. On the other hand, disappointment on ECB limited Euro's strengthen. But so far the pull back is shallow and corrective. We'd anticipate ECB to gradually lean more towards a neutral stance with more positive economic data. So, we'll try to buy EUR/GBP on dip to 0.8740 this week, with stop at 0.8640. We're trading for a break out through 0.8851 resistance for 0.9304 high.

GBP/USD Weekly Outlook

GBP/USD's sharp decline and break of 1.2768 support last week indicates resumption of decline from 1.3047. Also, it affirmed the case that consolidation pattern from 1.1946 has completed at 1.3047 already, well below 1.3444 key resistance. Initial bias stays on the downside this week for 1.2614 key near term support. Break there would confirm our bearish view and target a test on 1.1946 low next. On the upside, above 1.2802 will bring turn bias neutral and bring recovery. But outlook will remain bearish as long as 1.2977 resistance holds.

In the bigger picture, fall from 1.7190 is seen as part of the down trend from 2.1161. Price actions from 1.1946 medium term low are seen as a consolidation pattern, which could have completed after hitting 55 week EMA. Break of 1.1946 low will target 61.8% projection of 1.5016 to 1.1946 from 1.3047 at 1.1150 next. In case the consolidation from 1.1946 extends, outlook will stay remain bearish as long as 1.3444 resistance holds.

In the longer term picture, no change in the view that down trend from 2.1161 is still in progress. On resumption, such decline would extend deeper to 100% projection of 2.1161 to 1.3503 from 1.7190 at 0.9532.

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U.S. Review

Calm Before the Storm

• It was a quiet data week in the United States before a slew of economic data and events next week, including a highly anticipated Federal Open Market Committee meeting.
• Job openings reached an all-time high for the series, but hiring and quits dipped, highlighting the structural challenges that remain in the labor market.
• Factory orders for April fell slightly, while the ISM nonmanufacturing survey signaled continued solid expansion in the service sector.

Calm Before the Storm

The economic data released in the United States this week were fairly light, with a full slate for next week. The most striking piece of data from this past week was the surge in job openings in April. Openings rose a sizable 259,000, surpassing 6.0 million in total and marking a new all-time high for the series (see chart on front page). This is an encouraging development, as the labor market continues to create jobs at a remarkably steady clip. Openings growth was generally broad-based, with gains in the private and public sectors. The few weak spots were concentrated in durable goods manufacturing and retail trade.

Despite the surge in new openings, hiring actually dipped in the month. As illustrated in the top chart, the job opening rate has risen dramatically since 2014, but the hiring rate has largely remained steady. The stagnation in hiring and the rising number of job openings suggest structural challenges beneath the cyclically improving labor market. A skills mismatch, uneven job opportunities by geographic region and other factors are weighing on the economy. This dichotomy between cyclical improvement and structural headwinds help explain many of the mixed signals present in today's labor market. One encouraging development is the location of recent job opening growth: openings are up 25 percent in the Northeast and 7 percent in the Midwest, two regions that have seen relatively slower growth this expansion, outpacing the faster-growing regions of the West and South.

The ISM non-manufacturing index dipped slightly in May to 56.9 (any reading above 50 indicates expansion). The business activity and new orders components declined, but the backlog of orders component reached a cycle-high of 57.0. The survey also showed a jump in employment, although this runs somewhat counter to the May jobs report, which saw private services hiring soften for many sectors. The ISM indices have moderated slightly from their post-election spikes, but both of them remain firmly in expansion territory and above the levels that prevailed in 2016. This signals that, although economic growth in 2017 will likely fall short of the three percent plus pace some market participants hoped for in the wake of the election, growth should improve from 2016's sub two-percent rate.

In the factory sector, the slow growth narrative for manufacturing and business spending remained intact. Factory orders fell 0.2 percent in April, but upward revisions to the March reading helped offset the decline. Core capital goods orders were modestly revised up from the March reading. As the bottom chart shows, core capital goods orders have clearly improved after a steep slide that began around when oil prices took a nose dive. After a few months of slow growth, however, core orders are growing at just a 3.8 percent three-month average annualized rate. Still, the main takeaway is that, modest as the core capital goods figures might be, they suggest that equipment spending had at least some positive momentum heading into Q2. We expect total real business fixed investment to increase at a 5.5 percent annualized rate in Q2.

U.S. Outlook

CPI • Tuesday

The Consumer Price Index (CPI) rose 0.2 percent in April, partially recouping the prior month's 0.3 percent loss. Energy prices, which tend to be a significant factor in the monthly headline performance, rose 1.1 percent on the month. The core CPI inflation environment remains soft, however. Core consumer prices rose a modest 0.1 percent in April, while the annual core inflation rate slipped below 2 percent for the first time since October 2015. The three-month annualized rate of core CPI has also fallen from its recent high, pointing toward further moderation in the year-overyear rate in the coming months.

We expect the CPI to be unchanged in May, with the year-over-year decreasing to 1.9 percent. While the CPI has been weaker than our initial expectations, our overall economic growth outlook remains in place, and we do not think the recent soft inflation prints will deter Fed officials from raising rates at the June meeting.

Previous: 2.2% (Year-over-Year) Wells Fargo: 2.0% Consensus: 2.0%

Retail Sales • Wednesday

Retail sales rose a less-than-expected 0.4 percent in April, while March's initially reported decline was upwardly revised to a 0.1 percent gain. The headline increase was supported by rebounds in auto sales and sales at building material & garden equipment stores, which rose 0.7 percent and 1.2 percent, respectively. Nonstore retailers, which continue to benefit from the structural shift towards online purchases, also reported a strong gain. Control group retail sales rose a more modest 0.2 percent in April, although the February and March prints were revised higher.

While April's increase in retail sales was weaker than expected, the details point to a potential acceleration of consumption in Q2. We expect retail sales to rise a modest 0.2 percent in May and look for personal consumption to increase at a 3.3 percent annualized rate in Q2.

Previous: 0.4% Wells Fargo: 0.2% Consensus: 0.1%

Housing Starts • Friday

Housing starts fell 2.6 percent to an annualized rate of 1.172 million units in April, disappointing consensus expectations for a modest gain. A 9.2 percent drop in multifamily starts accounted for the headline's entire decline, while single-family starts inched up 0.4 percent. We expect multifamily construction to continue to slow amid lessening demand and the onslaught of apartment completions that have inundated the market in recent years.

Despite the disappointing print, housing starts for the first four months of the year are running 5.3 percent ahead of their yearago level and single-family starts are up 7.0 percent. The upward trend in single-family starts is consistent with strong readings for homebuilder confidence. We expect residential construction activity to bounce back in May, and look for the pace of housing starts to rise to a 1.207 million annualized rate.

Previous: 1.172 million Wells Fargo: 1.207 million Consensus: 1.223 million

Global Review

Eurozone on Solid Footing in Q2

• The economic expansion that is underway in the Eurozone remains intact. The ECB said this week that the risks to the economic outlook "are now broadly balanced." That said, we believe that the ECB is still a long way from hiking policy rates.

U.K. Elections: Now What?

• Prime Minister May lost her gamble to increase the Tories' parliamentary majority in Thursday's snap election. A period of political uncertainty now settles in the United Kingdom. We expect that British economic growth will remain sluggish over the next few quarters.

Eurozone on Solid Footing in Q2

Data released this week showed that real GDP in the euro area, which originally was reported to have grown 0.5 percent (2.0 percent at an annualized rate), actually grew 0.6 percent (2.3 percent annualized) in Q1 2017 (see graph on front page). The revised data lifted the year-over-year growth rate from 1.7 percent to 1.9 percent. Moreover, the breakdown of the GDP data into its underlying demand components showed that the outturn was "good" in the sense that real GDP growth was driven entirely by growth in domestic demand.

Economic activity in the Eurozone appears to be expanding at a solid pace in the current quarter as well. Although factory orders in Germany fell 2.1 percent in April relative to the previous month, they remain up 3.5 percent on a year-ago basis (top chart). German industrial production (IP) rose 0.8 percent in April, which was stronger than expected, and March's IP outturn was revised higher. French IP dipped 0.5 percent in April, only partially reversing the 2.2 percent surge registered in March. In general, we expect that the modest pace of expansion that is underway in the Eurozone will continue for the foreseeable future. See the "Interest Rate Watch" on page 5 where we discuss the implications of recent economic data in the Eurozone for ECB monetary policy.

U.K. Elections: Now What?

In the United Kingdom, Prime Minister May's gamble to increase her parliamentary majority failed in Thursday's snap election. The final tallies are not yet complete, but as of this writing it appears that the Conservative Party will fall about 8 seats short of the 326 seats needed to form an absolute majority in the House of Commons. The British pound, which fell sharply in the wake of the Brexit referendum last year, weakened against the U.S. dollar in the immediate aftermath of the election (middle chart).

The surprise election results—most observers expected that the Tories would pick up even more seats when May called the snap election on April 18—will introduce even more uncertainty into British politics. The first task will be to form a new government. The Conservative Party will need to decide whether to govern with a coalition partner or to attempt to form a "minority" government. May's future as the leader of the Conservative Party, and hence, as the prime minister, is far from assured. Britain's hand in the upcoming Brexit negotiations with the European Union undoubtedly has been weakened by the election results.

After growing at an annualized rate of 2.3 percent in the second half of 2016, U.K. real GDP growth slipped to 1.2 percent on a sequential basis in Q1. Incoming data suggest that growth remains lackluster in the current quarter. Although British IP edged up 0.2 percent in April, it was not enough to offset the 0.5 percent contraction registered in March. On a year-ago basis, IP was down 0.8 percent in April (bottom chart). Although the election's outcome is probably not enough to push the U.K. economy into recession, we expect that real GDP growth will remain sluggish over the next few quarters.

Global Outlook

Chinese Industrial Production • Tuesday

China's industrial production (IP) undershot market expectations rising just 6.5 percent year over year in April—dropping from March's 7.6 percent pace. The slowdown in production was due to softness in overseas demand and domestic consumption. Electricity production slowed markedly over the month signaling that much of the weakness in IP was concentrated in manufacturing output. However, the production of steel, glass and cement fared better. For May, the consensus expects overall IP growth to slow further to 6.4 percent year over year.

Next week, retail sales and fixed asset investment are also slated for release. Retail sales growth cooled in April, as muted domestic demand constrained sales. Fixed investment growth remains a shadow of its former self. The recent weakness of all three figures suggests that economic growth more than likely slowed in Q2.

Previous: 6.5% Consensus: 6.4% (Year-over-Year)

U.K. Bank of England Rate • Thursday

The Bank of England (BoE) held rates for another month in May, voting 7-1 to leave its main policy rate steady at 0.25 percent, despite rising inflation in the United Kingdom. Yesterday, voters hit the polls for an early general election. Prime Minister May lost the Conservative parliamentary majority that she was hoping to keep, creating political uncertainty as the country begins to negotiate its Brexit terms. That said, we believe that it is highly unlikely that the BoE will change its monetary policy in the near term and expect for the bank to hold rates at 0.25 percent next week.

Other data on the docket for next week include retail sales, and producer and consumer price inflation. Consumer inflation has been running ahead of the BoE's 2 percent target for the past three months and currently sits at 2.7 percent year over year. The bank also upwardly revised its inflation forecast to 2.8 percent this year from its previous forecast of 2.4 percent.

Previous: 0.25% Wells Fargo: 0.25% Consensus: 0.25%

Australia Employment • Friday

Recently released data this week showed that the Australian economy expanded at a 1.7 percent annualized pace in Q1. Even with slower growth, the labor market added 37,400 jobs in April. Part-time employment accounted for all of the employment gains on the month, rising 49,000, more than offsetting the 11,000 decline in full-time employment. The participation rate held steady at 64.8 percent as the jobless rate fell two tenths of a percentage point to 5.7 percent—nearing a low not seen since 2013. Though, employment growth has been strong, wage growth, on the other hand, has been more stagnant.

That said, the forward momentum of the labor market also allowed the Reserve Bank of Australia to hold rates unchanged at 1.50 percent at its latest meeting. For May, markets look for the economy to have added 10,000 jobs.

Previous: +37,400 Consensus: +10,000

Point of View

Interest Rate Watch

ECB on Hold for Now

The European Central Bank (ECB) held a widely anticipated policy meeting this week. As expected, the Governing Council decided to keep its three main policy rates unchanged at the levels that have been maintained for more than a year (top chart). Furthermore, the Governing Council did not make any changes to its pace of bond buying, which currently totals €60 billion per month (middle chart). There was some speculation that the ECB may signal a further tapering in its quantitative easing (QE) program, but the Governing Council continued to say that it would buy €60 billion per month through the end of the year.

The Governing Council made one notable change to its policy statement. It had been characterizing the risks to the economic outlook as largely skewed toward the downside. However, the ECB upgraded its assessment and now says that the risks "are now broadly balanced." As discussed on page 4, the economic expansion that is underway in the euro area appears to be increasingly self-sustaining, hence the upgrade to the risk assessment.

The extraordinary amount of ECB policy accommodation has driven short-term interbank rates in the Eurozone into negative territory (bottom chart). Consequently, interest rates at which consumers and businesses borrow have also drifted lower. In our view, the policy accommodation that has been supplied by the ECB has contributed, at least at the margin, to the economic upswing that is currently underway in the Eurozone.

Looking forward, we believe that the Governing Council will announce further QE tapering steps this autumn and that the ECB will cease buying bonds in the first half of 2018. A rate hike seems even further afield. The statement released on Thursday acknowledged that "measures of underlying inflation continue to remain subdued." Until the core rate of CPI inflation begins to trend toward 2 percent in an unmistakable fashion, the Governing Council likely will keep rates unchanged. We do not think that the ECB will hike rates until late 2018, at the earliest.

Credit Market Insights

Consumer Credit Slows in April

Consumer credit rose just $8.2 billion in April, the slowest pace since mid-2011. Nonrevolving and revolving credit growth were soft in the month, rising 2.9 percent and 1.8 percent, respectively. Growth in revolving and non-revolving credit has stabilized at around 6 percent on a year-over-year basis, a trend that has held since early 2016. This convergence makes sense as student and auto lending cool, while revolving credit plays catch-up after an unusually slow recovery.

Over the past couple years total consumer credit growth has slowed. Relative to disposable income, however, consumer credit remains elevated. At 26.5 percent of disposable income, consumer credit now represents a larger share of disposable income than it ever has since the series began in 1960.

Also at an elevated level is the percentage of nonrevolving consumer credit held by the government and Sallie Mae (the former government entity that now offers private education loans). The share now stands at 38.7 percent compared to just 10 percent in 2010. As students continue to take out loans to finance schooling and the price of education continues to climb, this share is likely only to grow. As the Federal Reserve continues on its rate tightening schedule, it will be interesting to observe the response of consumers in the credit market. Chargeoff rates saw a spike in the final quarter of 2016 – will this continue?

Topic of the Week

Household Net Worth Hits All-Time High

Household net worth soared in Q1 on the back of rising home and equity prices. Aggregate household net worth in the United States now stands just shy of $95 trillion. On an inflation-adjusted, per capita basis, household net worth was about $261,000, well surpassing the prerecession peak (top chart).

A strengthening housing market has helped homeowners on the asset side of the balance sheet. The national CoreLogic Home Price Index was up 6.9 percent on a year-ago basis in April, up from 5.5 percent as recently as January. Lean inventories and a gradual shift in the demographic fundamentals have helped spur prices higher and promote a sellers' market. Equity markets also helped drive net worth higher: the S&P 500 rose 5.5 percent over the quarter.

On the debt side of the balance sheet, liability growth continues to pick up relative to the historically slow pace seen earlier in the expansion (bottom chart). The composition of household borrowing growth has shifted over the course of the expansion. Rapid growth in student and auto loans early in the expansion has begun to moderate, while mortgage debt and revolving credit have turned from outright contraction to steady growth.

The rise in net worth in Q1 corresponds with the continued strength in consumer confidence seen during the quarter. Yet, real consumer spending growth was a paltry 0.6 percent in Q1. It appears rising confidence and the wealth effect are being offset by other factors that drive consumer spending, such as slowing job growth and wages that have persistently failed to accelerate. Another factor to consider is that this data from the Federal Reserve is aggregate data that tells us little about the distribution of gains. If households that are seeing the bulk of the gains have a lower marginal propensity to consume, we might not see as much of a bump in short-term economic growth. We expect a rebound to 2.5-3.o percent real growth in personal consumption the rest of the year.