BMA Market Insights: U.S. June Unemployment Report, OPEC in Focus

The U.S. June unemployment report will take the spotlight on Friday; it is the last major unemployment data point the Federal Reserve will receive until its July 30th-31st meeting. A weak report, where the increase in payrolls falls below 100k, as it was reflected for May, may place pressure on the Fed to provide a more accommodative policy. However, as of this writing, market participants largely expected that more than 160k jobs were created in June.

Given the Fed’s dual mandate of low unemployment and stable inflation, last week’s Personal Consumption Expenditure index, the Fed’s preferred measure of inflation, suggested that prices may be firming (see more below). While low inflation levels have recently prompted the Fed to mull a possible rate cut, last week’s data may temper concerns regarding weak price pressures. Thus, if the June payrolls deliver a strong number, the Fed may be inclined to leave rates unchanged later this month.

Prior to the jobs report, the Organization of the Petroleum Exporting Countries and non-OPEC members will meet to decide on whether the curb on oil supply should be extended. Demand for oil may be hampered on the back of sluggish global growth, particularly in China. Similarly, supply may be hindered given geopolitical risks. Oil supply out of both Venezuela and Iran have fallen, both countries are under U.S. sanctions as well.

On the data front, market practitioners will also pay keen attention to manufacturing data to be released this week across major economies including China, Europe, Canada, and the U.S.

Last week, the trade truce between China and the U.S. and optimism between the two heads of state meeting at the G20 Summit over the weekend propped up equity markets. The S&P 500 climbed about 6.8% last month, the best June for the index since 1955. The S&P 500 capped the month at 2,933.09. Similarly, the Dow Jones Industrial Average had its best June since 1938, with a 7% rally over the month. The index closed the week at 26,599.96. Conversely, Treasury yields edged lower, as the 10-year Treasury hovered around 2.007% at the close. Finally, continued tensions between the U.S. and Iran supported energy prices with WTI crude trading near $57.99/barrel at the close.

I. U.S. Economic Data/Markets

Personal Consumption Expenditure index, the Fed’s preferred measure of inflation, rose 0.16% in May m-o-m on a seasonally adjusted basis. It is the third consecutive month for inflation to at least meet the pace to reach the Fed’s annual target of 2%.
- Core Personal Consumption Expenditure index rose 1.6% y-o-y in May. The index was up 2.02% on a quarterly annualized basis through May.
- At its June meeting, the Fed lowered its inflation projection for 2019 to 1.5% from the 1.8% forecast in March.
Michigan Consumer Sentiment slightly surprised to the upside coming in at 98.2 for a final reading compared to a preliminary reading of 97.9.
Chicago PMI reflected a contraction in June, falling to 49.7 from 54.2 in May. Producti0on fell to a three-year low.
Q1 GDP grew by 3.1%, though unchanged from last months estimates. Components of growth slightly shifted as business investment came in stronger than previously estimated, conversely consumer spending slowed.
Pending Home Sales bounced higher in May, rising 1.1% m-o-m. On an annual basis, sales were down 0.7%, the 17th consecutive month of annual decline.
Durable Goods declined in May, falling 1.3% m-o-m, due to a decline in aircraft orders which dropped 28.2% over the month. Excluding transportation, durable goods were up on the month by 0.3%.
Nondefense Capital Goods Orders surprised to the upside with a 0.4% m-o-m increase in May compared to expectations of a 0.1% increase. A steep pick-up in shipments largely contributed to the data.
Fed Official Bullard said a 50 basis point rate cut in July would be overdone.
- Weak inflation and uncertainty surrounding the growth outlook would likely warrant a 25bp cut in July.
- FOMC Chairman Powell noted that the Fed is “mindful” not to overreact to “any individual data point or short-term swing in sentiment,” after noting that the case for a more accommodative policy had strengthened on the back of trade uncertainty and its impact on global growth.
- He emphasized that the Fed is insulated from short-term political pressures and will not bend to short-term political interests.
Fed Official Kaplan expressed that it was too early to adjust monetary policy and that the Fed should remain patient to see how uncertainty surrounding trade and global growth unfolds.
- Concerned that if the monetary stimulus was implemented, given the current state of the economy, it would contribute to a build-up of excesses and imbalances in the economy.
Consumer Confidence dropped to a 21-month low to a reading of 121.5 in June compared to a reading of 131.3 in May. Economists largely expected a reading of 131.3.
New Home Sales fell for the second consecutive month in May, with a 7.8% m-o-m decline.
S&P/Case-Shiller Home Price Indices increased 2.5% in April y-o-y, meeting expectations. and was flat m-o-m.

II. Trade

China/U.S. – tentatively agreed to a trade truce and agreed to hold off on imposing further tariffs allowing time for discussions to resume between the two sides. President Trump agreed to remove some curbs on a Chinese company, Huawei Technologies. In turn, China will resume buying American agricultural products.

III. Economics Outside the U.S.

Eurozone Economy
- Inflation remained stable at 1.2% in June, unchanged from May and short of the ECB’s target of 2%.
- German Harmonized Index of Consumer Prices increased by 1.6% y-o-y in June, beating expectations of a 1.4% increase. Higher food costs and prices within the services sector contributed to the data.
- Business climate fell to .17, a 0.13 drop from May.
- Consumer confidence declined to 10.3.3 in June from 10.5.2 the previous month. It is the lowest reading since August 2016.
- German confidence dropped by 0.3 points to 9.8, the poll measures confidence surrounding economic activity, wages and respondents’ willingness regarding consumption of goods.
- German IFO sentiment survey fell to levels not seen in nearly five years. The business climate reading in June fell to 97.4 versus May’s level of 97.9.
U.K. Economy
- Q1 GDP’s final reading was in line with expectations at 0.5%.
- Consumer confidence fell to -13 in June from May’s -10, a seven-month high. Confidence levels disappointed estimates of -11.
Canadian Economy
- GDP surprised to the upside growing at 0.3% in April versus expectations of 0.1%.
Japanese Economy
- Industrial Production increased in May, rising 2.3% m-o-m versus estimates of a 0.7% increase.
- Unemployment remained unchanged in May at 2.4% m-o-m.
  - The job-to-applicant ratio fell, indicating that the labor market could slacken in the next few months.
- Core CPI rose 0.9% in Jun y-o-y meeting forecasts.
- Retail sales increased by 1.2% y-o-y in May and 0.5% m-o-m, matching expectations.
- Bank of Japan’s April meeting minutes reflected officials providing a timeframe regarding its forward guidance. At the time, the bank said it would keep rates at ultra-low levels for at least one year. Uncertainty surrounding when the bank may hit its inflation target coupled with questions surrounding the global economic outlook prompted the bank to provide greater clarity in terms of its forward guidance.