Jun 2, 2017 - changes in this sector have increased uncertainty with respect to ... From a supply perspective, the usual
StreetStuff Daily June 2, 2017
BECAUSE: The way to get good ideas is to go through LOTS of ideas, and throw out the bad ones…
1 June 2017
Data preview: May employment report Thu 6/1/2017 3:28 PM
May Employment Preview Stephen Stanley Chief Economist
…In any case, all but the most diehard doves are now willing to concede that the economy is essentially at full employment (and many are admitting that it may already have pushed beyond that point). It is hard to imagine that the May employment report can do much to change that broad view of the labor market, though skeptics are continuing to focus on the lack of decisive run-up in average hourly earnings and will surely play up that angle if wages fail to accelerate. I look for a 190k increase in payrolls in May, not much different than year-to-date average. The April rebound in jobs marked the third time in four months that job growth exceeded 200k (sandwiched around March’s stinker result). The May results could settle in at a pace relatively close to the underlying trend… Thursday, June 01, 2017 10:43 AM
Thursday 10:00 Data Stephen Stanley Chief Economist
Attached is a summary of the May ISM manufacturing survey report. Meanwhile, construction spending was softer than expected. The April tally fell by 1.4%, with public sector outlays especially soft. In addition, the revisions for February and March imply a marginal downward adjustment to Q1 GDP, as downward revisions to private nonresidential structures (a category that had posted a 28% annualized surge) more than offset an upward boost to government outlays. As a result of these data, I am taking one tenth off of both Q1 and Q2 real GDP tracking estimates, leaving me at 1.1% for Q1 and 3.5% for Q2
For the May employment report, scheduled for release tomorrow, we expect headline payrolls to increase by 175k, in line with its recent average. We expect most of the increase to come from the private sector. Payrolls surprised to the downside in March due, in our view, to warm weather early in the year that may have pulled some hiring forward into January and February, and adverse weather in some regions of the country in March. The rebound in April employment suggests these factors have largely played out and, alongside claims data that show some improvement in the separation side of the market, we look for another month of solid employment growth. Elsewhere, we expect the unemployment rate to hold at 4.4%, average hourly earnings to rise by 0.3% m/m and 2.7% y/y, and for hours worked to remain unchanged at 34.4. 1 June 2017
US construction spending springs negative surprise in April, lowering Q2 GDP tracker to 2.2% …The weaker than expected public construction spending in today’s report lowered our government spending estimate for Q2 17, while softness in non-residential construction spending lowered our structures estimate modestly. Consequently, our Q2 GDP tracking estimate declined to 2.2% q/q saar from 2.3%. 1 June 2017
US CPI Inflation Outlook
Still solid, but with more two-sided risks We view the macroeconomic outlook as supportive of inflation. The economy continues to grow at a moderate pace, the
output gap has all but closed and labor markets remain strong. The continued decline in the unemployment rate and gradually rising wage pressures are likely to support the inflation outlook in the medium term as labor markets tighten further. Potential expansionary fiscal policy at this stage in the business cycle, when the economy is operating at full potential, presents another upside risk to inflation from the top-down approach. From the bottom-up, data in recent months have exposed weakness in specific CPI components that warrant close monitoring. We see core goods as remaining a significant headwind to inflation. Used and new vehicles and medical goods are all acting as drags on this series, which in our view suggests broadly based softness. We expect the impact from a stronger dollar in 2015 and 2016 to have abated by now and import price data have indeed improved in recent months. Yet core goods inflation has not picked up. We see structural changes in specific core goods CPI components as likely weighing on core goods prices. Core services inflation, and shelter in particular, remains robust and we think it will continue to support inflation pressures. However, looking at indicators of housing demand and supply, we see a better balance between supply and demand and, in turn, we envision a modest rise in vacancy rates after years of steady declines. As a result, our models suggest less upward pressure on shelter and we foresee more two-sided risk than at any point during the recovery. Medical care services inflation has softened in recent months, although past and expected government policy changes in this sector have increased uncertainty with respect to the outlook for price changes A closing output gap and tightening labor markets point to further upside pressures, while weakness in some individual CPI series point to some softness ahead. Right now the bottom-up approach seems to be winning, although we expect that, as wages pick up further and the economy operates at full potential for a sustained period, price pressures will materialise. Hence, we expect inflation to accelerate in 2018. The trend for 2017 is likely to remain sideways. We maintain our view that the Federal Reserve will tighten policy twice this year in June and December. In addition we expect the FOMC to start reducing the balance sheet in September. Labor markets remain strong, and communications about the desire to normalize policy from FOMC members has been clear and consistent. Softer-than-expected recent CPI prints are unlikely to deter the FOMC from action.
1 June 2017
Municipal Strategy Monthly
Performance and Outlook – May 2017 •
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The Bloomberg Barclays Municipal Index posted a positive total return in May, generating +1.59%, bringing the year-todate total return to 3.94%. Munis outperformed the US Treasury Index, which returned +0.65%. The high yield municipal index generated total returns of +1.53%, bringing the year-to-date total return to +6.36%. The taxable municipal index generated excess returns of +0.52% and slightly underperformed the US credit long index by 0.02%. Spreads for taxable munis were 4bp tighter m/m, while the long credit index tightened 3bp. Muni issuance in May totaled $38bn, up 31% m/m but down 10% y/y, with net issuance at +$16bn. Year-to-date, gross issuance stands at $157bn, with net issuance at +$34bn. Muni fund flows remained positive in May, with inflows averaging about $450mn per week. As of May 24, 2017, ICI data show that fund inflows totaled $1.9bn during the month, bringing year-to-date inflows to $9bn.
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As expected, the Fed kept rates on hold at its meeting earlier in the month. The minutes of the meeting suggested that a June rate hike is more likely. Investors continue to price in a growing probability of a June rate hike, with fed fund futures pricing in close to a 90% probability of a rate hike in June. The municipal market rallied strongly during the month, with the muni curve flattening and outperforming treasuries across all tenors. The rally in munis was primarily driven by market technicals as demand continues to be strong and net supply is expected to be negative over the next few months. This technical may continue going into the summer months; however, strong valuations pose a risk to this outlook. We discuss recent developments in Puerto Rico, and make a case that GDB bonds may still have more room to run. We compare the main provisions of the ACA and AHCA bills and analyze possible effects on healthcare credits.
Outlook
… We expect a strong technical picture entering the summer months. After experiencing a week of outflows at the beginning of April (most likely driven by tax-related selling), muni funds have reported seven straight weeks of inflows, indicating strong demand for the asset class. From a supply perspective, the usual heavy issuance in June (which has been the highest month of issuance on average over the past 20 years) should become less of a factor as investors receive more cash over the summer months due to heavy redemptions. We also view Treasury Secretary Steven Mnuchin’s comments last week stating that the administration supports the preservation of the muni tax-exemption as reducing uncertainty and hence favorable for the market. However, despite strong technicals, we think risk remains to the downside as valuations are close to the richest levels in five years. 1 June 2017
Asia-Pacific Macro Themes
China back in focus China has returned as a market focus since last month’s AsiaPacific Macro Themes •
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China reportedly to fine-tune CNY fixing mechanism to re-introduce more policymaker discretion, which may reflect an effort to placate the US administration by allowing stronger CNY fixings, in our view. Moody’s downgrade to A1/stable was a reminder to investors, in case they forgot, that financial stability concerns still loom large. We note that growth in Barclays Alternative Credit Aggregate has slowed, albeit to a still-high 15% y/y from 20% a year earlier. In the May APMT, we highlighted key questions for markets going into the 19th Chinese Communist Party Congress later this year, and maintain our view that top leaders will put a heavy weight on maintaining macro stability into year-end.
We now expect a “sooner and slower” Fed balance sheet normalisation • The May FOMC minutes put more emphasis on balance sheet normalisation than we expected, so we pull forward our expectation of action on this front to Sep (from Dec) and put the next rate hike call, following the 25bp increase this month, to Dec (from Sep).
Bank of Japan not seeing much reason to do anything • Our economists expect nationwide core CPI to peak at 1.0% y/y in Sep, well shy of the BoJ’s target, potentially requiring the Policy Board to downgrade its inflation forecasts (1.4% for FY17,1.7% for FY18). Look for this to happen next month when with the release of the BoJ’s next Outlook Report and when two new Board Members join. Policymakers, who have acted aggressively over recent years, appear content to sit on the sidelines for an extended period, which is consistent with BoJ signals. India structural reforms continue • Progress toward a 1 July implementation of the GST is a very visible example of the government’s commitment to structural reforms, keeping us comfortable with our constructive view on Indian assets. In May, the GST Council made important progress and we will monitor closely its next meeting in early June. Our global FX/rates strategists see an absence of identifiable trends, drawing investors into low-vol-driven trades, benefitting INR and IDR • TWD: Foreign flows into the equity market continue, supporting the BoP and TWD. Once again, we flag risks skewed towards more TWD appreciation. 1 June 2017
Global
Global manufacturing confidence recovers in May …In conclusion, global manufacturing confidence has regained some of its momentum in Q2 following the weak showing in April, and we view these levels as sustainable. 1 June 2017
US Money Markets Libor: Repo benchmarking In addition to providing more detail about balance sheet normalization, the May FOMC minutes also update the Fed’s (and Treasury’s) planned repo benchmark rate proposal. The Alternative Reference Rate Committee (ARRC) will vote on the two proposed Libor candidates – OBFR and a Treasury GC rate – at its June 22 meeting. According to the minutes of their
April meeting, the committee appears to be leaning toward a Treasury GC rate that includes cleared bilateral transactions.
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The Fed and Treasury are modifying their three benchmark repo index proposals to include a large – and underreported – segment of the Treasury collateral market. The cleared bilateral delivery-versus-payment (DVP) Treasury repo market is somewhat larger than the more familiar tri-party market. Specials transactions need to be filtered out of the bilateral DVP data to arrive at a generic financing rate. However, identifying these transactions may be difficult. All three proposed rates trade about 5-6bp over the RRP. But it is unclear how these spreads might evolve as the Fed’s balance sheet normalizes or with greater cleared repo adoption. The May FOMC minutes also noted the volume decline in eurodollars. Federal Reserve staff are analyzing potential definitional changes that could keep OBFR volumes from declining further.
troubling seasonal tendency for the June NFP release (May’s data) to disappoint, with last year’s miss still painfully fresh. This is arguably contributing to the reluctance to set-up for a more inspired jobs report. We’ll also suggest that with inflation such an important unknown, skewing the odds of a miss on AHE (or even the market’s response for that matter) offers a unique set of risks for this particular release. Momentum in the Treasury market remains constructive, with stochastics decidedly in favor of lower yields, but shy of overbought. Any asymmetry in the risks ahead of the BLS report is more a function of the outright level of yields than anything else. 10-year yields for example are twice as far away from meaningful support (2.30% opening-gap) as they are from resistance (2.181% yield low). While that logic will surely make the CMTs cringe, the continued building of volumes in the 2.20% to 2.24% zone has created a more meaningful base for a bullish breakout – should the data so inspire. On a break beyond the 2017 low yield mark/close of 2.163% there is the balance of the opening-gap from November to fill that ends at 2.15%. On a truly disappointing print, a break of 2.15% will meet remarkably little resistance before the handle-change at 2.00%.
Thu 6/1/2017 3:13 PM
Lyngen/Kohli BMO Close: Distinct Divergence Tactical Bias:
It’s difficult for us to make a strong case to be bullish at the bottom of the yield-range ahead of what in all likelihood will prove to be another strong employment report less than two weeks ahead of a Fed rate-hike, so we won’t attempt it. In fact, we find ourselves in the same camp as many of the respondents to our pre-NFP survey – happy to remain sidelined with a bias to buy any back-up in yields. The most significant caveat that we’ll offer is that the market hasn’t lost the bulk of the monthend bid with 10-year yields still solidly anchored below 2.25% -- an achievement unto itself in the context to the 4.4% unemployment rate and Q2 GDP tracking at 4%, regardless of where NFP prints on Friday. Frankly, it’s the price action itself that has us more cautious about playing for a major back-up in rates – in light of all the bond bearish news on Thursday (from ADP to the grind higher in stocks), the market weakened only modestly. Moreover, most of the downtrade occurred during the overnight session and NY just offered confirmation. We’ve been focused on the
As we’ve previously highlighted, the anecdotes for this month’s employment report are effectively evenly split with 6 positive anecdotes versus 5 negative ones. The constructive proxies include ADP, Claims, as well as the Labor Differential. That said, there is a strong seasonal bias for the June NFP release (May data) to disappoint and the regional Fed surveys showed softer jobs – factors that have us a bit nervous, especially as we won’t see ISM non-manufacturing until next week.
01 Jun 2017
Global Rates Plus - The crucial month of June Summary Core bonds ended May more or less unchanged from their levels at the start of the year. In the US and UK 10-year yields are down 20bp; in core and semi-core eurozone, they are up 10bp. But June should herald big changes from a number of sources: • Monetary policy: Our economists expect the June ECB meeting to herald the beginning of the move towards tapering QE, with President Mario Draghi
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expected to change the characterisation of the economic outlook to “balanced”. The June FOMC should produce a rate hike and more concrete balance-sheet reduction plans. Prices: After two months of soft inflation numbers and falling inflation forwards, the euro area flash for May was just about strong enough to keep the reflation narrative alive: the US May CPI print will also be vital.
2s5s steepener, 2y fwd. It carries positively and the forward curve remains very flat. Entry: 17bp. Target: 40bp. Stop: 10bp. Current: 21bp
Slowing inflation pressure is a major source of uncertainty in rates markets. The shockingly weak inflation prints in the past two months suggests May CPI data will be critical.
olitics: The most likely outcome of the UK election is that uncertainty as to the UK government’s fiscal stance will fall, not rise. Likewise, James Comey’s testimony before the Senate intelligence committee may bring fireworks, but is unlikely to precipitate formal proceedings.
On 14 June, the FOMC rate decision (with press conference), retail sales and US CPI data are all released within six hours. Our economists continue to expect 2.1% CPI in 2017 and 2.5% in 2018. Given this context, 2y breakevens look low and we maintain our recommendation:
Our expectation is that by the end of June the newsflow around the first two of these issues will indicate a bearish trajectory for yields in H2, albeit mitigated by political event risk on both sides of the Atlantic.
Long 2y TIPS breakeven (TIPS Apr-19). Entry: Entry: 156bp. Target: 180bp. Stop: 147bp. Carry: averages +4bp/month. Current: 152bp.
What’s more, the effect of the shift in the global balance between issuance and QE has not yet been felt: but it will be during H2. Indeed, in the euro area net supply net of QE has been more negative in Jan-May this year than in Jan-May last year, due to higher redemptions and larger QE. But over the next seven months, this will reverse: and net supply net of PSPP should be almost EUR 100bn higher than it was in 2016. We expect this shifting supply/demand will also put upward pressure on yields during the second half of the year. Also in this week's Global Rates Plus: EUR supply-demand dynamics to reverse in H2 Quarterly forecasts: A change in Japan Eurozone: Important ECB meeting ahead Eurozone spreads: Seasonal cheapening of OATs in early June Peripheral spreads: 2s5s BTP flatteners at attractive levels US: Trade recommendations that reflect our revised forecasts MBS: Impact of reduced rate forecasts Japan: Buy 1mx5y receiver vs pay 1y1y USD/JPY xccy Australia: RBA unlikely to act Eurozone inflation: Summer break on the horizon EUR/USD xccy basis: Closing receiver and preparing to pay
US: Trade recommendations that reflect our revised forecasts Fedspeak has been mixed with Brainard sounding less hawkish than Kaplan. Brainard suggested that if softer inflation data persists, it could lead her to re-assess the appropriate policy path. The central case for the Fed seems to be two more rate hikes this year and the onset of balance sheet normalization. We expect the Fed to hike 25bp in June and December (and a little more than one 25bp hike is priced for the rest of 2017). We maintain our recommendations relating to Fed policy tightening at the front and back-end (via balance sheet reduction) of the curve: EDZ7 risk reversal (buy 98.25 put vs selling 99.00 call). Entry: 0.5bp. Target: 10bp. Stop: -4bp. Carry: 0.1bp. Current: 0bp.
Our expectations for higher 10y rates, as expressed via option strategies overleaf, and a steeper curve could find some tactical support from cleaner positioning. CTFC data on futures (top chart), suggest speculative positioning is very long TY (10y UST) futures, but still very short Eurodollars. Risks to our bearish trades include increased overseas purchases of USTs (bottom chart). USTs offer more attractive yield pick for FX-hedged investors from Japan and Europe with tighter cross-currency basis.
MBS: Impact of revised rates forecasts We have lowered our yield forecasts due to: 1) Reduced expectations of fiscal stimulus; 2) softerthan-expected year-to-date inflation; and 3) lower term premium because of the slow reaction to the prospect of FOMC balance sheet normalization. We now expect the 10y UST to finish at 3.0% and 3.25% for 2017 and 2018, respectively, 50bp and 75bp lower than our prior forecasts. Possible positive impacts of our reduced rates forecasts on MBS are: Positive carry will likely remain. With lower rates for longer (compared to our prior forecasts), mortgages could face less extension risks and shorter hedge ratios (top chart), which improves their hedged carry. MBS could benefit from low volatility with a more moderate rise in rates. Additionally, the Fed’s proposal on monthly balance sheet reduction caps may dampen volatility for the MBS performance. Any basis widening is expected to be very gradual. On the demand side, the Fed’s reinvestments will likely be 37% lower (vs 44% slower from the prior forecasts) in 2017, due to slower prepayments as the10-yr UST yield rises from the current 2.20% level to 3.0%. Possible downside risks to MBS (see table) from our revised forecasts include: Higher supply but weaker demand. Refinancing activity is likely to fall by 37% if 10-year UST yield rise to 3% and 30y mortgage rates rise above 4.50%. But, the purchase market may stay healthy at this rate level as housing remains affordable. Overall, we expect net issuance to rise to USD 273bn in 2017 from USD 248bn in 2016 – USD 43bn higher than our prior forecast. Demand from yield buyers (such as domestic banks and overseas investors) may be more muted than initially thought, as those investors are likely less active in the sector until rates stabilize at a higher level.
Macro Matters - 1 June 2017 Summary BIG PICTURE: Budgetary progress and perspectives From the US, to the eurozone, across to Latam and Asia, we assess the budget outlooks for the main economies, and also take a longer-term perspective of deficits and debt. THEMES OF THE WEEK Italy: Politics, German style? With Italy now looking more likely than not to hold an early general election, we have put together our answers to recent questions clients have had for us about the process.
US: Domestic profits squeezed by low inflation S&P 500 companies have reported strong quarterly earnings, yet the latest NIPA tables show profits being squeezed. We examine the discrepancies between the two measures and ask which is more economically relevant. …The evolution of profits helps to explain why inflation has been relatively weak and has not picked up as much as might have been expected given an economy at full employment. Chart 3 breaks down the increase in the deflator for private business value added into its various cost components. Since mid-2015, only in one quarter have profits per unit of output made a positive contribution – all the rest are negative. Over the last year, on average, the fall in profits per unit of output has subtracted about 0.7% from the year-over-year rise in prices.
Moreover, profits seem to move in the opposite direction (as a contribution to inflation) to unit labour costs (ULC). When we estimate an equation that explains the movements in the nonfinancial corporate sector’s prices, in recent years we can characterise it as: largely dominated by a constant term (which perhaps is representing stable inflation expectations); with a reasonably strong influence from exchange rate movements, after a long lag, and little or no impact from unit labour costs or compensation. Chart 4 summarises the data behind these findings. The employment cost index shows little variation in recent years and therefore cannot explain the evolution of prices of the non-financial business sector, whereas there is a good correlation (with a lag and a lot of damping) between the exchange rate and pricing. Past exchange rate movements suggest prices – and therefore profits – could do better in the immediate period ahead, but if wages and the
exchange rate both strengthen as the Fed tightens, then profits could eventually be in for a rough ride.
The market has largely unwound its, once very extreme, short GBP position ahead of the UK election. We expect the USD to recover on US data validating expectations of a strong rebound in Q2 US growth.
…US payroll data are out on Friday 2 June. Following the much stronger ADP data already released, markets are likely anticipating a strong print. Forward-looking indicators continue to suggest there has been a rebound in growth in Q2 – the Atlanta Fed estimates US growth in Q2 at 3.8% currently. With data signalling the strong Q2 rebound we expect, it is possible that expectations for Fed tightening could start converging closer towards our economists’ forecast for six more hikes through to the end of 2018. We remain positioned for USD strength against the AUD in our portfolio of recommendations – see page 4. Japan: Rate hike no longer likely Our new lower inflation forecast (CPI downside surprise and yen strength) invalidates our call since the start of the year that the BoJ would hike the target for the long-term rate this year. We have therefore decided to take it out. Brazil’s COPOM: Reform uncertainty hurts BCB cut rates by 100bp to 10.25%, but signals slower cutting ahead, on reform uncertainty. While political noise clouds the outlook, we think cyclical factors argue for lower rates and that it will take longer to reach a terminal rate. Brazil’s infrastructure plan: Keep walking Brazil’s government has been implementing an ambitious infrastructure plan this year. More than BRL 18bn in new investment has been auctioned to the private sector.
…Rebuilding USD longs via AUDUSD Short USD exposure is now at its largest in over four years at -23 (on our scale of +/- 50), US yields are low and markets are pricing in only 60bp of tightening through end 2018 (we forecast 150bp). We maintain considerable USD upside exposure and stress the potential for current USD weakness to reverse. From current levels, our favoured USD long is AUDUSD towards our 0.72 target. We initiated this recommendation on 23 February (spot ref 0.7695). Several relevant structures from current levels are flagged following this piece.
Global Daily Macro Monitor
2 June 2017
US: We expect the last employment report preceding the June FOMC meeting to be solid, which will likely allow the FOMC to proceed with a rate hike.
Brazil: Brazil’s central bank cut its policy rate by 100bp to 10.25%.
Thu 6/1/2017 2:19 PM
Global FX Plus - Position For Strong USD Finish to Q2 Weekly FX key themes: Position short EURJPY ahead of the ECB
Hawkish expectations for the ECB meeting appear overdone; we recommend short EURJPY positions ahead of the meeting.
US Q1 GDP growth disappointed at just 1.2% (SAAR) but the weakness appears temporary and is set to rebound to 2.9% (SAAR) in Q2. Forward-looking indicators, such as the Atlanta Fed’s GDPNow indicator, are already signalling just under 4% growth for Q2. With US bond yields (especially 10-year) at such low levels, data releases that are consistent with a Q2 growth rebound should also support the USD. Our economists note that growth has averaged 1.16% since 2000 and then trends higher into mid-year. Our forecast for Q2
(2.9% SAAR) should be well above the average for this period (1.94% SAAR).
01 Jun 2017 10:04:26 ET
US Economics Flash NFP preview: Wages front and center •
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With growth on a more solid footing but realized inflation soft, average hourly earnings may get more attention than payrolls in the May employment report. We expect a weaker than consensus 0.1% MoM and 2.5% YoY wage growth. The probability of a June hike, currently priced above 90% is likely to be relatively insensitive to average hourly earnings print, but the market will reprice the subsequent pace of hikes lower on a disappointment. An upside surprise would lead not only to the market pricing faster rate hikes, but also likely push up market-implied inflation expectations further out the curve. We, and consensus, expect the unemployment rate to remain at 4.4%. Following stronger than expected 253K ADP May payrolls, the market will expect nonfarm payrolls growth stronger than the current 180K consensus. We revise up our headline payrolls forecast from 165K to 175K following the ADP report.
US Rates at the Bell June 1st, 2017
Recap & Discussion:
Let’s take stock of some of the things we learned in today’s rather moribund (price action and volume-wise) session: 1) employment growth appears still-solid despite the 4.4% unemployment rate, 2) the manufacturing sector is still doing well with a good
backlog from new orders, 3) Treasuries traded relatively well despite today’s data and 9 names and 24 tranches of new corporate supply (most un-swapped) 4) June 8th is crowded with potentially market-moving events, 5) stocks hit another record high, 6) Q2 growth still on track for a nice rebound relative to Q1’s disappointment, 7) we could finally be at an inflection point for wage growth (see article linked below) and 8) few investors appear to believe that tomorrow’s NFP print will move the market that much. On the last point, our swaption desk told me today that 1d10y breakevens for tomorrow traded at ~4.1bp today, the lowest level they could recall for a NFP report of some potential consequence for the Fed. Welcome to summer, I guess. …This WSJ article http://on.wsj.com/2qFYM3l just popped up and it makes the point that the changing composition of new jobs could soon lift annual wage gains. In essence, the article noted that the growth of private sector payrolls (excluding three low-wage categories) is now faster for the first time since the crisis than the growth of employment in the 3 low wage segments: leisure and hospitality, retail and temporary help. As the author notes, “In two previous periods of sustained economic growth, in the 1990’s and 2000’s, annual wage gains accelerated by nearly a percentage point once better paying jobs began to grow at a faster pace than low-wage employment.” Worth a read methinks.
…5s7s10s ‘fly. Kind of a noisy data series on Bloomberg but the chart still shows that 7’s are nearing the rich end of their recent range in this admittedly directional ‘fly. Recent foreign and domestic real$ buying in 7’s no doubt a driver here.
5s7s10s: 7y USTs back to the rich end of the recent range…
01 June 2017
01 Jun 2017 15:58:57 ET
Alert: Skew of NFP Estimates Points to Upside Surprise
Global Macro Strategy
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In this note, we look at the distribution of economists’ estimates of Non-Farm Payrolls releases, and what predictive power it may hold for the NFP surprise. We find that the skew of estimates can be a useful predictor of the direction of NFP surprises. As expectations for tomorrow’s release are positively skewed, our analysis points to an upside surprise for tomorrow’s NFP print.
…To measure skew in this analysis, we use the relative size of the 2nd and 3rd quartiles (Q2 and Q3), as shown in the formula below, because it minimizes the impact of outliers and has a relatively simple calculation. However, other measures of skew were also tested with comparable res
CitiFX | 01 June 2017
NFP Preview: What AHE can tell us about September The June payroll could be less influential than usual. Citi economists are on the downside for jobs and wages (165k, 2.5%), but the bigger response would be on better data. Still, facing the Fed blackout preFOMC market follow-through could be quite modest. … The bigger downside risk is with an extremely soft number. (NFP 60k over/under consensus, AHE 2.3%/2.8%). A weak surprise could bring sequencing change into the picture. Citi economist believes balance sheet runoff in September would be read as dovish (link). On the other hand, strength may relieve some concerns on soft data. The issue is that it may take more evidence than one payroll for investors to reload USD longs, with the Trump theme –significant tax cuts, border taxes – now fading into the background.
Weekly Views and Trade Ideas – Flailing Conservatives This Week’s New Trade 2s10s USD flattener. Global growth is broadening but inflation pressures weak due to flat Phillips curves and disinflation from commodity prices. This “goldilocks” outcome normally favours stocks over bonds but we think yields continue to fall, and curves to flatten, because Central Banks are tightening despite low inflation. As in 2004-2006, higher Fed policy rates do not give rise to higher yields. Better growth in Europe and Japan, and weak inflation/ falling yields is not $ positive unless or until tax reform/ fiscal stimulus emerges from Trump et al. We stay short vs INR, BRL and EUR. A weak $/ lower yield mix likely helps EM as much as China tightening hurts but switch attention to Asia/ CEEMEA relative to Latam. MYR looks attractive in FX. The UK Election has echoes of 1945 for us. Brexit is won (like the War) so vote to end austerity and for social welfare. If Churchill could lose in 1945 with 80%+ approval ratings, are you sure May can’t lose now given recent polls showing a hung Parliament? We were stopped out of a long GBP position this week and, with positioning cleaner, £ downside is likely if, like Trump in the US, May disappoints. …
Yields Still Falling
As discussed in Global Asset Allocation: May 2017, current macro-economic conditions have some of the “Goldilocks” about them. Real GDP forecasts are rising, notably recently in Europe and Japan. But inflation remains moribund (Figure 2). One reason is that global Phillips curves remain flat (Figure 2. RHS and Figure 3). Despite sharply falling unemployment rates, wage inflation remains low. The Phillips curve has steadily flattened over recent decades and is materially flatter now than in the 1960s when it came to prominence1. Our rates strategists suggest that adaptive inflation processes may be at work. Inflation is expected to be low because it has been so low previously. This is an echo of the 1970s and 1980s when inflation expectations were adaptive to a period of high inflation. In theory, rational agents should not look back but “believe” Central Bank targets. However, after a period of below target and forecast outturns this may not be the case.
Premature Central Bank tightening only acts to lock in those
expectations of inflation no higher, and probably lower, than Central Bank targets….
Risks: Early Fed balance sheet roll off. Very weak data force Fed to delay hikes or cut rates.
Figure 6. USD Curve Flattening
… The double top in yields at 2.6% coincided each time with Fed hikes. Furthermore, yields are lower than when the Fed first raised rates in December 2015. This is not unusual. In the 2004-06 cycle, yields prevailing at the time of the first Fed hike in June 2004 were around 4.76%. This level was not breached to the upside until the Fed had hiked a further 14 times!
The target for us remains 2.0-2.10% 10y yields, which is the double top target and back to the pre-Trump Election trend (Figure 5, LHS). We remain long, rolling to the Sep (TYU7) future. Figure 5. Fed Hikes Just Flatten Curve
01 Jun 2017 10:13:54 ET
RPM Daily Short Covering US Duration In US, on-going short covering in the 10y sector of the curve (of around $7m DV01) has driven positioning to increase its net longs in futures (to 1.0 across the curve). This dovish tilt is also growing in ED Eurodollar, with the red pack at max long and in profit (at 2.2 out of 5.0). However in cash a mild short bias (of -0.8) is maintained largely concentrated in 30y. 01 Jun 2017 14:45:55 ET
US Agency MBS Focus We also remain in a curve flattener, 5s10s. While spot 5s10s has flattened some since inception this has been slightly more than offset by adverse roll down leaving our P&L near flat. Part of the original idea was that fiscal stimulus/ tax reform would raise the long run Fed Funds expectations in the market. But we also thought that the curve could bull flatten if Trump disappointed. In the event, this latter view has been right and we are not hurting on the trade. Since Citi economists expect tax cuts to re-appear on the policy agenda later this year we hold the trade for now. But we also note that 2s10s, more of an immediate Fed tightening vs 10y trade along the lines of what we see in Figure 5, is still flattening more aggressively. We had been reluctant here because of the large short position evident in euro-$ futures reports from CFTC. But, with this unwinding some we elect to enter a 2s10s 6mf swap flattener. Adverse roll down is 7bp. Trade: Enter 6mf 2s10s flattener trade. 6m2y at 1.67%. 6m10y at 2.24%. 6mf 2s10s at 57bp. Spot reference 64bp. Pricing as of 17:00 GMT 01/06/2017
Relative Value in Short Duration MBS We remain neutral on 15y MBS vs. 30y MBS. 15s/30s valuations have bounced off of recent tights but demand for carry remains high. 10/1 and 7/1 hybridARMs now look fair to 5/1s, but the sector as a whole remains rich to 15s. 10s continue to trade tighter than 15s and we see potential for widening. 20s have recently richened relative to 30s and we turn to a modest underweight from neutral. 01 Jun 2017 16:11:32 ET
European Rates Weekly ECB exit strategy The June ECB opening statement is unlikely to move markets, and while the Q&A should ask markets to wait for Sep17, there is a bearish undercurrent.
That includes asymmetric risk on 2019 HICP projections, stonewalling on sequencing because Weidmann joins Coeure in watching bank profit impacts, and because raising rates ‘well past’ net asset purchases, as currently priced by markets, is incompatible with financial stability. We think short to intermediate rates should push higher on the back of the upcoming June press conference and the decisions to be taken in Sep-17. The ECB opening statement should be pretty close to the April vintage with references to growth moving to balanced and risk of lower rates removed. There is no drama here because it has been widely flagged even at previous meetings. The main focus will be on inflation. Staff projections may not show a drop in 2017 HICP that our economists had previously expected. The 2019 inflation forecast (currently 1.7%, core 1.8%) have an upward bias on the back of stronger growth, but Draghi’s four tests for sustainably higher inflation are not met and so the messaging here is dovish anyway. The bear risk stems from two factors. (1) We expect Draghi to leave all options on the table for Sep17 and that includes an assessment of costs/benefits of negative rates and the possibility of a grand-bargain on rates versus QE. In other words, sequencing risks are not removed. 2) The grand bargain could instead be removing references to “well past” when describing the timing of hikes following the period of net asset purchases. Given that the first 15bp hike is priced for mid-19, when the Bundesbank thinks 800 banks will be risk from ECB rate policy, our view remains that the risk premium is too low. The sequencing risk has optionality but selling the belly works across any still favorable growth scenario. …
UK – Bigger than Brexit?
There is now just one week to go before the UK general election on 8 June. The market is finally beginning to take notice. The polls show a tightening race. The accuracy of the polls can be debated – and we will – but the important point is that closer polls make anything possible. It’s all about turnout in the under 24s. A Labour-led government would be bigger than Brexit in terms of a political upset, but perhaps not in terms of market impact. That’s because the decision to
leave the EU, and trigger Article 50, is a much bigger deal for the market than which politician gets to preside over it. Still, it would be enough to make us more bearish on gilts for the medium-term. 01 Jun 2017 14:03:02 ET
Global Commodities Focus Oil stockpiles are drawing down robustly and counter-seasonally in the US and globally; meanwhile, RINsanity may be back Global oil inventories data are showing counter-seasonal draws, and US storage tanks are the most visible indicator here, but this is providing surprisingly little support yet for oil prices, after crude soldoff following the OPEC meeting last week that saw petrostate production cuts extended for nine months (see Energy Weekly); Citi continues to see ongoing inventory draws through 2Q-4Q helping crude to reach the $60s later this year. Domestic and foreign demand for US crude is at record highs. US commercial crude stocks fell 6.4-m bbls to 510-m bbls (more than the
average of Bloomberg surveyed estimates of a 2.7-m bbl draw); including SPR, crude stocks fell 7.4-m bbls to 1,197-m bbls, down 31-m bbls from the recent end-March peak. Refinery runs were up 0.2-m b/d w/w to another all-time high of 17.5-m b/d. Crude imports fell 0.3-m b/d w/w to 8-m b/d, as flows from Canada, Kuwait, Iraq and Saudi Arabia dropped. (Note Saudi exports in May have dropped below 7-m b/d, which could show up in tighter imports ahead.) US crude exports jumped 0.7-m b/d w/w to 1.3-m b/d, a new record high. A currently tighter BrentWTI arb might stymie export levels for a period, but this might be more a reflection of strong domestic crude demand rather than a weak pull on exports. EIA estimated weekly output at 9.34-m b/d, up 22-k b/d w/w and 0.6-m b/d y/y. Monthly EIA data showed US crude production up 62-k b/d to 9.098-m b/d in March, with Texas and North Dakota
Inflation would make investors more tolerant of capex and less obsessed with payouts.
flattish at 3.3-m b/d and 1-m b/d respectively. Note though that this is 40-k b/d below the weeklies.
Figure 1. Global Capex And Payout ($bn)
Gasoline inventories fell 2.9-m bbls to 237-m bbls.. 01 Jun 2017 12:26:46 ET
Weekly Supply Monitor Euro, US and UK Supply Outlook US There is no UST supply or cash flows next week
US net cash requirement (NCR) over the next 4 weeks The NCR is neutral for USTs on a settlement date basis as there are no supply/cash flows settling over this period (Figure 20). Figure 20. US weekly cash flow profile for next four weeks, USD billions
01 Jun 2017 19:45:06 ET
US Municipals Strategy Focus
Illinois update
01 Jun 2017 16:30:00 ET
… Today, S&P cut Illinois’ GO bond rating to one notch above speculative grade (to BBB- from BBB), citing the long running political stalemate. Illinois’ appropriated debt was cut to BB+ from BBB-. Moody’s followed suit soon after and cut GOs to Baa3 from Baa2. There is no doubt that Illinois is at a crossroads and a negative credit spiral remains a very real possibility. However, we still see some possible upside for Illinois debt and we discuss.
Global Equity Strategist
01 Jun 2017 12:16:03 ET
Capex Up, But Payouts Up More •
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Capex And Payouts Both Up — 2017 is on track to be the first year since 2012 when capex increases (+3%). Global payouts are forecast to rise even faster (+5%). Rebalancing Continues — While this cyclical recovery in capex is welcome, the structural shift towards shareholder payouts continues. US leads the way. The UK and Australia look similar. Companies in EM, Japan and Continental Europe are finding it harder to kick the capex habit. Why? —1) subdued growth, 2) previous bad capex decisions, 3) investor desire for income. Global stock markets currently value shareholder payouts more highly than capex. This is unusual in a bull market. The Endgame: Inflation — The ongoing preference for payouts over capex is logical in a world of deflationary overcapacity, but it should eventually close output gaps and bring pricing power back.
UK Economics View 2017 Elections: May’s Premiership Suddenly at Risk?
Ahead of the 8 June elections, the polls have tightened to a degree we had not expected a few weeks ago (see Figure). The Tories still have a significant lead and we maintain our base case for a larger majority, but with much lower certainty. With many voters still undecided, the key in the last week before the vote will be whether the Conservatives can stop the erosion of their advantage on leadership; whether Labour can mobilise enough young voters; and which party’s key topic – Brexit for the Conservatives or public services for Labour – dominates the rest of the campaign. We have written extensively on the consequences of Theresa May and the Conservatives failing to boost
their majority in Parliament or a Labour-led government taking over after 8 June. In this update, we add a scenario where no majority government emerges, with serious repercussions for the Brexit process.
01 June 2017
The Credit Suisse Playbook On the road to QExit Next week's ECB meeting is likely to mark the first step down the road to gradually removing accommodation. In this week's Credit Suisse playbook, we detail our expectations for the evolution of ECB policy, and discuss the likely implications and our outlooks across markets. Our European Economists expect that the ECB will remove the most dovish elements of its current forward guidance at the June meeting, opening the path to more detailed QExit announcements in September. With little evidence of building inflation pressures at this point, the transition toward removing accommodation is likely to be a gradual one.
Our Rates Strategy Team discusses what is priced in European rates, and what the changes (or lack thereof) in ECB communication may mean for these yields. While they see room for hike expectations from 2019 and out to reprice higher and expect German yields to rise meaningfully as the ECB becomes less accommodative, they do not expect a repeat of the US taper tantrum experience. Our FX Strategists see scope for EURUSD to trade modestly higher in coming weeks, but note that further upside is limited by market expectations having already shifted in a bullish direction. As the EUR continues to rally across the board, our Technical Analysis Team looks for further broad-based strength for the currency to emerge. Bullish European equities has been one of their core calls, and while many of their core targets have been achieved, they remain bullish. Our Global Equity Strategists review the conversations and feedback from an extensive recent round of marketing. They assess what many clients believed was the surprising strength of equity markets recently, and refresh the debate around euro area equities, where they remain positive despite recent outperformance.
01 June 2017
US Economics: The Week Ahead Next Week's Highlights The US calendar is light next week, with ISM nonmanufacturing, JOLTS, and the Flow of Funds Report as the only major data releases. The Fed’s blackout period ahead of the June 13-14 FOMC meeting will start on Saturday, June 3rd. We expect JOLTS job openings to remain elevated in April. The number of job vacancies per unemployed worker rose to a new cycle high of 0.8 in the March report . However, labor turnover metrics – hires and quits rates – continue to suggest modest wage growth. The Flow of Funds Report from the Federal Reserve is likely to show further improvement in household wealth for Q1. Housing prices have continued to rise steadily in recent months, and equities performed strongly to start the year. Given disappointing Q1 GDP growth, the ratio of household net worth to GDP is likely to reach a new cycle high.
Forecast Update: our Q1 GDP revision estimate came down to 1.1% (QoQ ann.) from 1.2% due to downward revisions in construction spending. We continue to expect growth to pick up to 3.1% in Q2.
Deutsche Bank 02 June 2017
Early Morning Reid Macro Strategy Welcome to another payrolls Friday. DB expects a well above consensus 235k print (market at 182k) which Joe LaVorgna notes is supported by a strong 253k ADP print yesterday. He thinks there was evidence of retail jobs stabilising in the report after a difficult period for the sector. Other reasons for Joe's call is that the four-week moving average of jobless claims during the May survey period was 241k, which was the lowest for any employment survey week since July 1973 (240k). Also he argues that withheld income tax receipts are tracking up close to 7% compared to a year ago, which points to rising income growth. Since tax receipts are a direct function of employment, hours and wages, the recent acceleration in income growth should at least partly be reflected in the pace of job gains. Joe remains less confident in wages, where the growth rate remains soft relative to the sub-5% level of the unemployment rate. After some recent data apathy if Joe is right on payrolls there will be some renewed excitement in markets.
As interesting as today is though, next Friday we may be in need of a cold towel and a lie down as by then it'll be the morning after the night before in terms of knowing the results of the UK election, digesting a potentially pivotal ECB meeting and dealing with the aftermath of former FBI Director Comey testifying to the Senate Intelligence Committee. A super Thursday. Just on Comey, the Committee confirmed that the former FBI Director will firstly appear in an open session in the morning followed then by a closed meeting with the panel later in the day. …Over in bond markets the impact of the data was a small nudge up in the probability of a June rate hike to 88% from 84% just prior to the data based on Bloomberg’s calculator. 10y Treasuries (+0.9bps to 2.212%) stayed range bound while bond markets in Europe were a bit mixed again with Bunds flat, BTPs weaker (+5bps) and Portugal bonds stronger (-5bps). Meanwhile the big mover in commodities again was Iron Ore (-1.84%) which took another leg lower following that soft China PMI print yesterday. After reaching a high of nearly $95/tn back in February, Iron Ore has now tumbled 41% to $56/tn. Away from that Oil ended little changed despite being up over 1.70% intraday at one stage, while Gold (-0.23%) faded a bit. …In the PDF today we’ve updated the tables and charts we often use with PMIs from major countries alongside YoY change in equity markets with a table as to where the PMIs suggest regional equity markets should be YoY. Following May’s data the PMIs across key markets suggest most major markets should be 1318% higher than a year ago with the notable exception of Germany which should be 32% higher! With PMIs flattish over the last month but with equity markets rallying over the period they do now look a little expensive on this simplistic measure in most countries. Germany is the exception (8% cheap) as equities haven’t kept up with the PMI at 59.5 – the highest by a considerable distance of the larger global economies. Elsewhere European equities are generally a few percentage points expensive now. Both China and the US are about 2% expensive based on the latest data. As we always say this exercise should be a general guide to valuations and works best looking across the board rather than for individual markets where quirks can lead to temporary divergence from ‘fair value’.
01 June 2017
US Daily Economic Notes May employment preview …Through the first four months of the year, retail trade employment in the BLS report has declined by -3.6k on average, which compares to gains of 17k per month in 2016. As the ADP survey indicated yesterday, it is possible that retail employment is stabilizing after a swath of store closings earlier this year. To be sure, the secular uptrend of online shopping will continue to pressure retail hiring long term, but for now at least, the latest ADP data hint at a healthy rebound in retail hiring in May. As the chart below shows, the monthly change in ADP trade, transportation and utilities employment is significantly correlated with that of retail hiring in the BLS report. This makes sense because retail trade accounts for a little less than 13% of private payrolls compared to less than 5% for transportation and utilities. There are a couple of other reasons why we expect an above-consensus May employment gain. One, the four-week moving average of jobless claims during the May survey period was 241k, which is the lowest for any employment survey week since July 1973 (240k). Jobless claims are one of the best real time indicators of the health of the labor market and highly correlated with overall economic activity. Two, withheld income tax receipts are tracking up close to 7% compared to a year ago, which points to rising income growth. Since tax receipts are a direct function of employment, hours and wages, the recent acceleration in income growth should at least partly be reflected in the pace of job gains. We are less confident in wages, whose growth rate remains soft relative to the sub-5% level of the unemployment rate. If our forecast for May average hourly earnings (AHEs) proves prescient, the year-over-year growth rate of the series would likely round up to just 2.6%, which compares to a 2.5% annual pace in April and a cyclical peak of 2.9% from last December. For some Fed policymakers, a 3.0%-plus growth rate of AHEs would be more consistent with firming core inflation prospects. However, despite still-low wage inflation, the May employment report should keep the FOMC on track to hike rates again at the June 14 meeting.
02 June 2017
Euroland Strategy ECB is in no hurry
The June ECB meeting next week is unlikely to result in a significant change in policy stance from the ECB. The diminished downside risks to growth and expected rise in core inflation could allow the ECB to remove the reference to the possibility of lower rates. The likelihood that the reference to an increase in pace or duration of QE purchases could also be removed is lower. The ECB will want to keep other elements of its forward guidance intact which includes maintaining interest rates at current levels well beyond the end of the ECB’s net asset purchase programme to preserve an accommodative monetary policy stance. We expect the ECB to indicate that a decision on QE beyond Dec-17 will be announced at the September meeting. The steepening of the German 10s30s curve since the French election is not explained by the developments in level of rates, periphery spreads, implied volatility and inflation breakevens. We maintain our 10s30s flattener and paid position in the 5s10s30s fly. Risks of an Italian election in Q4-2017 have increased. Our central case, based on polls, remains for a heterogeneous coalition which does not include populist eurosceptic parties. The increased risk is reflected in the significant move higher in yields especially at the long-end of the curve and in cross-market spreads. In fact, Italy is now cheaper than Portugal on our twin deficit metric.
FLASH BRIEF: US EMPLOYMENT SITUATION Wage Power Still Missing Nonfarm Payrolls Could be Upstaged by Average Hourly Earnings Nonfarm payroll growth is the most watched headline on the economic calendar but average hourly earnings, given the approach of the Fed's FOMC meeting later this month, may get at least as much attention in Friday's employment report especially if they fail to live up to expectations.
Federal Reserve policy makers are prepared to raise rates at their June 13 & 14 policy meeting even though inflation is low and losing traction. The core PCE price index managed only a 0.2 percent gain in April for a year-on-year rate of only 1.5 percent, down 1 tenth from March and going in the wrong direction. And the reason inflation is low is because wage growth is low. Average hourly earnings have been stuck at 2-1/2 percent which is a full percentage point under where they need to be in order to give overall prices a boost. Expectations for average hourly earnings in May are very modest with Econoday's consensus at a monthly gain of only 0.2 percent for a still very subdued year-on-year rate of 2.6 percent. If wage traction falls short, there would be one less reason to withdraw monetary stimulus and expectations could begin to erode for a rate hike at the June 13 & 14 meeting.
1 June 2017 | 12:09PM EDT
US Daily: May Payrolls Preview (Hill)
We estimate nonfarm payrolls increased by 170k in May – an upward revision from our initial estimate of +160k and somewhat below consensus of +180k. Our forecast reflects some softening in service sector employment surveys, a return to normal weather, and a modestly slower pace of hiring in May, reflecting labor supply constraints in an economy near full employment. We estimate the unemployment rate remained stable at 4.4%, based on our expectation that household employment will hold on to its sharp year-to-date gains. Finally, we expect average hourly earnings to increase 0.2% month over month and 2.5% year-over-year in tomorrow’s report, reflecting the interaction of firming wage growth with unfavorable calendar effects.
1 June 2017 | 10:42AM EDT
Published June 2, 2017
USA: ISM Manufacturing Rises; Construction Spending Disappoints
Americas: Automobiles
BOTTOM LINE: The ISM manufacturing index rose in April against consensus expectations for a flat reading, suggesting that the domestic manufacturing sector continues to expand. Construction spending was weaker than expected in April, while earlier months were revised up. Following this morning's data, we revised down our tracking estimate for Q2 GDP growth by one tenth to 2.5% (qoq ar). Our May Current Activity Indicator moved up by one tenth to 3.3%. 1 June 2017 | 11:09AM EDT
Global Leading Indicator (GLI): May Final GLI - Headline GLI growth declines Headline GLI growth slows for first time since November 2015 Headline GLI growth decreased to 4.42% year-onyear in May, down from our revised April estimate of 4.51%. This is the first reading in which the yoy growth rate of the GLI has fallen since GLI growth last bottomed in November 2015. As we recalculate the entire GLI history each month incorporating all available data, this month's series shows that the decline in the headline GLI actually began last month, with a further drop in May. Month-on-month GLI growth also slowed, to 0.260%, this month, its lowest level in more than a year.
Broad weakness in GLI components Only two of the underlying components strengthened in May: Global New Orders Less Inventories and US Initial Jobless Claims, and both of these improvements were fairly minor. Of the eight components that softened this month, Korean Exports exhibited the largest decline, falling one and a half standard deviations. The Japan IP Inventory/Sales Ratio, the GS Australian and Canadian Dollar Trade Weighted Index, and the Belgian and Netherlands Manufacturing Survey all decreased by approximately one standard deviation. The S&P GSCI Industrial Metals Index® and the Baltic Dry Index weakened modestly, and the Consumer Confidence Aggregate and the Global PMI were effectively flat.
May SAAR softer than expected, GM inventory the most off-sides SAAR decreased yoy and sequentially; incentives increase yoy May SAAR of 16.7mn finished slightly below our/Bloomberg consensus 16.8mn; the pace decreased 1.3% sequentially from April’s 16.9mn and was down 3.0% yoy (May 2016 at 17.2mn). On an absolute vehicle basis, units were down 0.5% yoy. Despite this, Auto shares increased by an average 2.0% (vs. S&P500 +0.8%) as we believe investor sentiment was more negatively positioned against the industry. Incentive growth continued, rising 12% yoy (vs. April +14% and March +15%), growing $371/vehicle yoy – with passenger car and light truck incentives both +12%; meanwhile pickup truck incentives were more restrained, +1% yoy for the Detroit Three to $4,900/unit (Exhibits 3 & 5). Inventory days’ supply finished at 67 days – up from 59 days last May, but down sequentially from April’s 75 days, as every major manufacturer excluding GM reduced inventory days (Exhibit 4). In absolute vehicles, inventory was up 9% yoy. Our take: Underlying demand continues to soften in 1H17, and we expect that growing incentive spend is needed to keep SAAR at/above a 17mn pace as overall vehicle affordability sees incremental headwinds (rising interest rates and tightening auto credit) in 2H17 (Exhibit 7). Interestingly, bulls have tweaked down their base case with a plateau in the high 16mn/low 17mn range still seen as “okay” – down from low-to-mid 17mn.
Ford sales -1.7% yoy on declining retail sales, but fleet positive The yoy decline was driven by a 13.6% decrease in passenger car sales (selling-day adjusted), while truck sales were +3.0%. Retail sales were down 4.8%, even as incentives increased 15% yoy (per Autodata), while fleet sales grew 4.7% on timing of rental car sales. F took 40bps of share.
GM sales down 5.2% are larger production cuts coming? This was driven by -13.0% passenger car sales and -1.8% yoy truck sales. Retail sales were down 3.5% yoy – as incentive growth slowed to +4% yoy (+2% for cars, and +5% for light trucks), while fleet sales were down 12%. Inventory finished the month at 101 days’ supply, up from 99 at April-end, and 67 last May. GM lost 20bps of market share.
FCA -4.8% yoy on weaker passenger car sales down 30% yoy Light truck sales were flat yoy on tougher comps. Retail
sales were down 3% yoy, while fleet sales were down 11% yoy. Incentives grew 10% yoy, primarily driven by passenger cars (+27%). FCA lost 10bps of share.
Exhibit 2: New home sale prices are above typical existing home sale prices Median sales price, new home vs. existing home
Exhibit 7: As incentive growth has decelerated, the pace of SAAR has too US light vehicle SAAR vs. yoy incentive growth
1 June 2017 | 4:33PM EDT
The Credit Line: 2 June 2017 | 4:19AM EDT
A global look at credit quality: The good, the less good and the ugly
Global Markets Daily:
A global look at credit quality
Favor Exposure to Low Price Tier of US Housing Market (Young)
In 2006, the inventory of homes available for sale in the US began to rise sharply, pointing to the emergence of an over-supplied market. By contrast, the inventory of homes available for sale today is near an all-time low. Housing supply appears particularly constrained in the more affordable price tiers, while the high end of the property market is more fully supplied. Home prices in the US are up 6% overall over the past year, but prices on condominiums in San Francisco are up only 0.5% on the year, and apartment rents in San Francisco are down 6% year-over-year. We expect the trend of under-performance of the high price tier to persist, and thus within structured products would favor sectors less exposed to the more expensive market segments. Subprime nonagency RMBS, agency credit risk transfer and agency CMBS pools are primarily exposed to the low-to-medium price tiers of the property market, while jumbo prime and option ARM non-agency RMBS are concentrated in the more expensive markets and appear more vulnerable to future house price declines.
Exhibit 1: The inventory of US homes available for sale peaked in 2007, and is now near historical lows Single-family homes available for sale (SA)
We extend and refine our toolkit for assessing corporate credit quality globally. We incorporate nonfinancial companies, not just in the US and Europe, but also in emerging economies: Latin America (Latam), Asia ex-Japan, and Central and Eastern Europe, Middle East and Africa (CEEMEA). We also provide more granularity across the rating spectrum. We focus on non-financial companies with publicly traded debt in the dollar, Euro, and Sterling markets.
DM: Europe remains friendlier than the US For developed economies, our estimates suggest the joint trajectory of net leverage and interest coverage ratios remains much friendlier in Europe, particularly in the Euro area, relative to North America. Since 2010, net leverage has declined while interest coverage ratios have increased for the median Euro area-domiciled nonfinancial company in both IG and HY. By contrast, the median North American non-financial firm has seen net leverage ratios sharply increase relative to their 2010 levels, while interest coverage ratios slightly declined. On the positive side for North American companies, we would note the continued slow improvement in earnings and revenue growth since 1Q 2016. While we think this improvement will gain more momentum, we expect the fundamental backdrop will likely remain friendlier in Europe.
EM: Asia recovers; Latam and CEEMEA slog For emerging economies, our estimates suggest that the median IG and HY non-financial firms in CEEMEA are less leveraged than their Latam and Asia ex-Japan counterparts. Across the three regions, median net leverage and interest coverage ratios have also been slowly improving since 2014. But relative to their respective post-crisis peaks in credit quality, the median Latam and to a lesser extent CEEMEA non-financial firms are still significantly worse off. By contrast, the
median IG firm in Asia ex-Japan has the narrowest gap in credit quality relative to the post-crisis peak, owing to the significant decline in net debt on balance sheets over the past few years. Finally and similar to the DM complex, revenue growth also rebounded in Asia exJapan and CEEMEA while it decelerated in Latam. 2 June 2017 | 9:37AM BST
European Economics Analyst:
On the country level, we have upgraded mediumterm growth in Germany and Spain, but downgraded our assessment of Swiss growth in 2017. In the UK, we have brought forward our modal expectation of the first rate rise forward, from 2019Q2 to 2018Q4, the same quarter in which we expect a transitional adjustment deal to be announced on Brexit. The adjustment to our rates call owes to a revised assessment of slack.
European Outlook — Cautiously optimistic
Relative to our year-ahead outlook published last November, European activity has outperformed in the first half of 2017. Activity in the Euro area has undergone an acceleration since mid-2016. Acknowledging that the recovery appears both robust and resilient, we have upgraded our growth forecasts to +1.8%yoy in 2017, including an upgrade of Q2 growth to +0.5%qoq, from +0.4%qoq. The medium-term outlook for Europe has improved since March. However, we also have reason to believe that the recovery will be restrained from here forward. Support for growth from the original drivers of the Euro area recovery -- lower oil prices, a weaker exchange rate and a revival of credit creation in the periphery -- are poised to fade. Chinese growth supported a global (and, under-appreciated by us, a European) upturn in 2016H2, but the authorities in Beijing are now beginning to withdraw stimulus, weighing on the European outlook somewhat as the expected fillip from external demand becomes more reliant on the US. This leads us to expect slightly more modest growth in 2017H2 compared with H1. Despite stronger activity growth, our forecast for core inflation is persistently below the ECB's target, owing to the dynamics of the 'German inflation cap' and the flat Phillips curve. The balance of risks to our outlook has improved. On the upside, output may continue to accelerate, should improving 'animal spirits' translate into higher domestic demand and further self-sustaining momentum. Additionally, the favourable resolution of political uncertainty may unlock investment. At the same time, downside risks persist. Upcoming Italian elections and the Brexit negotiations are potential sources of uncertainty and market dislocation. On a more fundamental level, headwinds from the periphery’s sovereign debt crisis continue to work against a rapid recovery, particularly in Italy. Tied partly to these risks, the ECB’s implicit support for highly indebted sovereigns remains important, but the ongoing recovery makes providing this support increasingly challenging from a political perspective. We think the ECB will retain an accommodative stance for some time to come, but the risks now lie to the hawkish side of our base case.
June 1, 2017 U.S. Economics: Employment Report Preview A preview table for tomorrow's employment report is attached. We're forecasting a 180,000 gain in payrolls, unchanged 4.4% unemployment rate and 0.1% rise in average hourly earnings lowering the year/year pace to 2.4% from 2.5%. We look for a gain in payrolls in May below April’s 211,000 but about in line with the post-election average in the past six months. The 4-week average of initial jobless claims and continuing claims fell to record lows in mid-May, pointing to a further decline to an historically low pace of firings, but continued high levels of optimism about job finding prospects in consumer surveys point to the quit rate continuing to move up to cycle highs, and while business surveys don’t point to any slackening in a stronger desired pace of new hiring, more widespread reports of labor shortages suggest restraint on the pace of actual hiring. The latest Beige Book found “most Districts citing shortages across a broadening range of occupations and regions ... impeding the ability of firms to attract and retain qualified workers.” Rising anecdotal reports of labor shortages potentially holding back new hiring obviously implies rising wage pressures. We expect that will continue to be apparent over time, but a calendar distortion is likely to result in a low reported average hourly earnings number in May. The 15th of the month payday in May was the Monday just after the end of the survey week, which in recent years has consistently biased down reported earnings (most recently to 0.1% in August 2016, 0.0% in February 2016, 0.0% in June 2015, and 0.0% in December 2014). We look for a 0.1% gain, lowering the year/year pace to 2.4% from 2.5%. The labor force participation rate fell slightly in April to 62.93% after rising to 62.97% in March from a low of 62.39% in September 2015. Considering the ongoing
underlying demographic downtrend of a couple tenths a year, that represented a pretty strong cyclical rebound driven by an increased rate of reentry by discouraged workers and by a lower rate of unemployed workers dropping out of the labor market. There doesn’t appear to be much room for further improvement in those prior drivers of the cyclical rebound in labor force participation, however, and if the participation rate just stabilizes from here for a time, the pace of job growth consistent with a stable unemployment rate is only about 100,000 a month. We expect the unemployment rate to just round up to an unchanged 4.4% in May, but if job growth doesn’t slow, it will likely continue moving down to new lows in coming months.
June 1, 2017 Treasury Market Commentary Daily Commentary, 6/1 Treasuries posted small losses across the curve Thursday, as there was an overhang of further month-end related buying, while a strong ADP report was discounted in large part but was seen as further reducing risks of a surprisingly bad enough employment report Friday to prevent the Fed from hiking rates in two weeks. ADP's recent record in predicting payrolls hasn't been as successful since they reworked their methodology late last year, so we didn't change our 180,000 estimate for payrolls (same as consensus) in response to the 253,000 ADP number. But the upside added to a broadly positive batch of early data and surveys and anecdotal comments like in the Beige Book in pointing to continued labor market gains. Our desk thinks market expectations are similar at around 185,000 or 190,000, and without a bad miss on Friday, a Fed rate hike on June 14 seems all but assured. That risk looks low, so futures market pricing for June moved up a bit more to 89% now. There's still not much priced past June, although the first fed funds futures contract fully pricing at least two rate hikes did at least move back a month to September of next year. Whatever the data show Friday, though, quite striking pricing of very short-expiry options indicates the rates market doesn't expect it to matter for the medium-term outlook past June. Overnight options on 10-year rates that expire at 11:00 Friday morning were being priced Thursday consistent with a breakeven move in the 10-year yield of only 4 bp. According to our
vol desk, it wasn't all that long ago that oneday options on even non-payroll days could price at a 7 or 8 bp breakeven, but daily yield moves that big have become rare in the collapse to historically low implied and even substantially lower realized volatility in recent months.
… Aside from the ADP upside, a bunch of economic data released Thursday were mixed and had little market impact. The manufacturing ISM was strong, rising a tick to 54.9, with robust results for the key components on orders, production, and employment. Weakness in business and government construction spending, however, lowered the outlook for both Q1 and Q2 GDP growth slightly, and we now see Q2 tracking at 3.0% instead of 3.1% and look for Q1 to be revised down to 1.1% from 1.2%. Auto sales also were modestly disappointing again, extending the slowdown from last year's record annual high as auto credit conditions have tightened.
June 2, 2017
FX Morning Daily Commentary, 6/02 Will the USD respond to payrolls? Every month there is great focus on the employment report, yet most months, the market reaction to any surprise lasts only a short period of time before reverting back to the previous trend. We have found no correlation between USDJPY performance on the day and the surprise on headline payrolls or wage data. Today should be no different, with the strong ADP report (253k jobs vs 180k expected) already setting up strong NFP expectations in the market (Bloomberg survey at 182k) and the June fed rate hike mostly priced in (92%). We instead focus on the wage data, as ultimately that will be the driver of US inflation expectations. Our economist has an under-market expectation for average hourly earnings at 2.4%Y (2.6%Y consensus), citing technical factors for the payday relative to the sample period. Within the G10, the JPY and NZD are the most sensitive currencies to the US 10 year yield.
June 1, 2017
Muni Monthly Dashboard: May - A Carefree Spring Munis outperformed even as Treasury yields fell. Ratios reached uncommon levels on strong technicals, putting subdued supply on display. The effect is a market where multiple risk measures imply strong investor optimism.
Ratios rich in context of current rates
Cross-asset value: The rich get richer Munis' cross-asset value fell this month, as ratios fell 4 ppt along the curve (Exhibit 6), with the 2y ratios falling 5 ppt (Exhibit 7). Swap spreads moved higher (LIBOR - MMD), as muni yields continued to push lower relative to LIBOR (Exhibit 8). Taxable muni spreads ended a few bps tighter but were volatile over the month, with a peak-totrough swing of 27 bps (Exhibit 9). In the context of current rates, ratios appear to be on the end of the rich tail (Exhibit 1) in the wake of significant muni outperformance.
Intra-market credit spreads: Mixed
Technicals: Supportive Demand – Inflows Ongoing Supply – Still Slow
June 1, 2017 FX Pulse: EUR Looking Good Temporary CNY adjustment: CNY and CNH have sprung to life following the introduction of a discretionary factor in the PBoC's fixing mechanism for USDCNY, and a sharp increase in short-dated CNH yields. We see this as a short-term adjustment to bring the CFETS index back into its previous (sideways) trading range, compensating for recent USD weakness. We do not expect a sustained increase in the trade-weighted CNY. We see this as CNY catching up with regional peers rather than something that drives another leg of EM appreciation. We think the dominant driver of EM currencies remains the healthy global growth dynamics and strong risk appetite. We stick to our long MYR, IDR, INR, PLN & CZK positions. Sell AUD: Australia’s house prices fell in May for the first time in 17 months, which could be the first sign that lending restrictions have reduced demand. Our ETF flow tracker shows that Australia, Canada and New Zealand all have received large foreign equity inflows in the past year. The reduced bank profitability outlook from a weakening housing market and the bank levy may drive
equity outflows and the currency lower. Iron ore prices also weigh on the currency. ECB in focus, buy the dip in EUR: Many in the market expect a change in tone at the ECB press conference this week and EUR positioning has turned long; therefore, significant indications about tapering or no more rate cuts are required to not disappoint. Signs that core Eurozone countries are moving toward integration are emerging, including reports that Germany could look for faster integration and the European Commission could be considering initial steps toward a banking union. EMU growth prospects should pull in foreign investment, pushing up the EUR. GBP a sell on rallies:There are a range of outcomes from the upcoming UK election. Our economists' base case for a Conservative majority should see GBPUSD rallying marginally to 1.32 by year end. Instead, we choose to sell GBP vs the EUR as GBP positioning is no longer extremely short and sentiment is less bearish.
June 2, 2017 Autos & Shared Mobility: Uh Oh... US SAAR Feeling the Osborne Effect? Unintended Consequences for the Auto Cycle US auto sales continue to decelerate with May's 16.7mm just below consensus expectations of 16.8mm. In addition to a potentially overstretched consumer, could we be witnessing an unprecedented buyer's strike?
1 June 2017
US Rates Rates – Total Nonfarm Payroll Forecast +186.4K mom in May Our models forecast a gain in total nonfarm payrolls of +186.4K mom versus consensus +180K mom. Our models forecast a gain in private sector
payrolls of +176.4K mom versus consensus +173.0K mom. See Table 1 for our models complete individual industry payroll forecasts. …CHAIR YELLEN’S PERSPECTIVE If our employment forecasts prove accurate, they may strengthen Chair Yellen’s basis for hiking short-term interest rates at the upcoming June 13-14th FOMC Meeting. Our models forecast a resilient pace of average monthly job growth over the year 2017 towards a monthly average rate of +188.3K mom. In the year 2016, the average monthly gain was lower, at +186.8K per month. If our employment and inflation forecasts for the coming seven-months prove accurate (and conditions improve further over 2017 into 2018), then Chair Yellen likely may implement another twenty-five bps hike to the Federal Funds rate’s target range in 2H-2017 (likely at the September Meeting) and possibly another TWO hikes in the year 2018 – see Tables 2 and 3. The FOMC may officially announce a “taper” of its maturing principal reinvestment program – possibly as early as at the June 14th Meeting Minutes, possibly to be implemented at the December 12-13th, 2017 Meeting. If our models forecasts prove accurate - for another TWO rate hikes from the FOMC in 2017, then the 2s-10s yield curve in Treasuries and swaps likely may flatten further toward our 71.2 bps objective before year-end 2017 – Chart 9 ! “Pro-growth” fiscal policy measures are sorely needed in the national economy and should they be implemented in 2018-2019-2020 then the “terminal” federal funds target rate may turn out to be close to 2.25% to 2.50% over the longer-run.
interesting recent data points, so we thought we would share them in a quick note. Firstly, while the headline S&P 500 continues to move ever higher, the dynamics within the US equity market are not so encouraging. The chart below breaks down the FT US non-financial universe into top and bottom quintiles based on balance sheet strength (as measured by Merton's Distance to Default). What is abundantly clear is that while the strongest continue to do very well, ever since the Fed surprised the markets back in February with a US rate move, stocks with the weakest balance sheets have struggled. The average stock, as measured by the equal-weighted performance, has also gone nowhere. Many are associating the surge in FAANG performance as a ‘go-for-growth' play, but in a reality it looks like investors are running scared into cash rich companies. This is not a Trump policy play, this is balance sheet risk. This aversion to debt may seem a little odd given that high yield bond yields are down at historical lows and the appetite for new issuance remains strong. What drives credit is typically a mixture of leverage levels, interest rates, asset prices and asset volatility. Corporate leverage ratios are currently high, despite near record asset prices, and while interest rates are gradually rising, credit spreads on high yield bonds have plummeted. Why? Well asset volatility is very low compared to historical levels, or to put it another way, asset price confidence is high. This, coupled with the continuous clamour for yield, is helping to compress corporate bond spreads. This overconfidence may be misplaced. If equity volatility were to move higher, lower quality bonds could struggle, as firms with poor balance sheets are already in the US equity market.
We will update our interest rate forecast Tables 2 & 3 following the monthly Nonfarm payroll report.
JUNE 1, 2017 JUNE 1, 2017
GLOBAL QUANTITATIVE STRATEGY IS THE US DEBT PARTY FINALLY OVER? US SMALL CAPS PULLED DOWN BY DEBT AVERSION We've been updating our charts on US corporate leverage and factor performance and there are some
ON OUR MINDS: EURO AREA ECB PREVIEW: THE COMMITTEES TO THE RESCUE? It's been a long time coming but, for the first time since Draghi took office, the Governing Council should next week finally see the risks to the growth outlook as “broadly balanced”. While the ECB is
taking credit for much of this improvement, explaining why inflation is not rising faster and why additional stimulus is needed remains a challenge. Next week, we also expect some adjustments to the rate guidance (dropping “or lower” and “well” in “well past”) to account for easing tail risks. However, with high uncertainty over the slack in labour markets, the ECB may also lower its 2019 inflation forecast. Along with a discussion on conditional scenarios for normalising policy, there is thus also a need for options of additional easing after December 2017. To prepare for these discussions, the relevant committees may again be called upon. A particular problem if the economy remains strong but inflation disappoints may come from tightening financial conditions. That could call for a longer QE programme, which would raise difficult questions on where to find the assets. For now, we expect the ECB to settle for a compromise in September of an extended APP, at least until June 2018, but at a reduced monthly pace already in 4Q17. That would allow for some flexibility, enabling accelerated purchases if needed while allowing additional time for markets and governments to prepare for an eventual end of the PSPP. In this regard, we believe there is merit in communicating in terms of total balance sheet expansion, rather than monthly flows. The recent experience of Portugal should reassure Governing Council members of a continued impact on yields and spreads, even with a tapered APP. JUNE 1, 2017
THE BIG PICTURE FAST, NOT FURIOUS How far is too fast? The European market is close to the multi-year peaks it reached in 2000, 2007 and 2015 - three instances when it subsequently corrected. Given the currently improving situation in Europe, both on economics and politics, and our view that equity allocators are underinvested in the region, we remain constructive. At the same time, we focus, within the region, on the segments of the market that have reached such highs that valuations simply no longer stack up. Europe finally back in favour European equity mutual funds and ETFs have posted $15bn in inflows year to date. However, this does not come close to the $100bn of outflows recorded in 2016. Thus, many global international investors are still underweight European equities. In our base case, European equities continue to rise (Euro Stoxx 50 target at 4,000 by end2018) and outperform US equities (S&P 500 target at 2,500). More upside on better fundamentals
US equities are not cheap (P/E of 18x, P/BV of 3.1x), but eurozone equities are, despite the recent rally (15x 12m earnings and 1.7x book value). They are supported by stronger fundamentals: higher cyclical indicators, lower unemployment rates and higher consumer confidence. Eurozone companies produced strong results during the 1Q reporting season, forcing analysts to raise their earnings expectations. Scope for better political background in Europe While US political gridlock is intensifying and Brexit negotiations will accelerate, the eurozone political situation is improving, notably with both the Dutch and French elections not having led to an extreme outcome. Any step in the direction of a change in governance at the European level and/or further integration, which the newly elected French president is pushing for, would reduce political risk and thus support a rerating of equities. We retain our preference for French and Italian equities. Italy is now at centre stage of political concerns, but we maintain our view that this provides an attractive entry point into a cheap market - as we did for France heading into the presidential election there. Selling the over-shooters While many commentators are focused on 1y record performances, we extend the time horizon to ten years, on both price action and valuations, to filter out the segments that have simply gone too far. We downgrade chemicals and construction. Meanwhile, we retain our strong preferences for value sectors, supported by the reflation story: financials, consumer discretionary and oil & gas.
JUNE 1, 2017
GLOBAL STRATEGY WEEKLY MINIMUM VOLATILITY = MAXIMUM COMPLACENCY The last time volatility in the US bond market was this low (and complacency this high), 10y yields spiked up some 150bp in only four months as part of Bernanke's ‘Taper Tantrum'. While we remain long-term Ice Age bond bulls, forecasting negative Fed Funds and 10y yields in the coming recession, in the near term investors should be open-minded. While on the subject of open-minded, what about the US profits rebound that is sustaining stockmarket euphoria? Are they really rebounding - as companies tell us? Well on one key measure we always watch, they are definitely not.
JUNE 1, 2017
FX WEEKLY JOBS DATA ARE LIGHT RELIEF FROM BREXIT SHAMBLES A steady pace of job creation in the US keeps growth trundling along at a 0.2% rate and inflationary pressures well contained. The Fed is on track to hike in two weeks, but that's priced in. This is enough to support our favourite EMFX picks (TRY, ZAR) and take JPY lower, notably against the EUR. As for the UK vote, it's unlikely to help sterling. Tightening opinion polls have triggered nervousness about the Brexit outcome.
Technicals EUR/USD has approached the potential of its inverse headand-shoulders pattern at 1.13, and any pullback should be cushioned at 1.1043. Below this, there is important support layered at 1.0860/1.08.
supportive of healthy job growth. ADP employment surprised to the upside in May; we are usually reluctant to take a strong signal from the release, but note that payrolls have outperformed the ADP print in the month of May on average since the crisis. Balancing this upside risk is the ISM nonmanufacturing employment index, which has averaged a subpar 51.5 over the prior two months and thus is consistent with job growth closer to 100k. Yet the pullback may revert as transitory factors (notably weather) could fade. Taken together, we see moderate upside risk to our payrolls forecast. … On wages, we look for a 0.2% m/m increase in average hourly earnings in May, factoring in some downward bias from calendar effects balanced by upside risks from further labor market tightening. That would leave the year-on-year pace slightly higher at 2.6%.
…Fixed Income A solid May payroll print would help bear flatten the curve, allowing investors to price in higher odds of a rate hike in June (currently at 92%). A good overall report, particularly if average hourly earnings appear to be accelerating on a y/y basis, also should help the market to price in additional hikes after the June FOMC meeting. The market is currently pricing in only 1.5 hikes from July to the end of 2018, which we think is too pessimistic. Risks are skewed toward a larger retracement on an unexpectedly weak print, especially if the wage data disappoint significantly. The market’s 88% pricing for a June rate hike implies investors see the hike as a foregone conclusion, but an unexpectedly weak report could temper rate hike pricing and result in a bull steepening of the Treasury curve.
1 June 2017
US Economic Comment ADP estimates private payrolls +253k in May June 1, 2017
US Data Preview SETTING UP FOR NONFARM PAYROLLS (MAY) We expect May nonfarm payroll employment to rise at a respectable 170k pace in May after registering a robust 211k gain in April. That puts payrolls gains well above their breakeven rate and just below the 3-month average pace of 174k. Near record low jobless claims, several survey indicators and unwinding negative weather effects remain
Strong ADP gives us confidence in a solid BLS payrolls number ADP estimates that private payrolls rose 253k in May, a strong print that came in well above expectations. This figure gives us confidence that the BLS's private payrolls number will come in solidly as well. We forecast +175k for BLS payrolls and this ADP does provide some upside risk to that forecast. Relationship between ADP and BLS numbers, though, is very rough
The gap between the initial ADP and BLS estimates over the past year has been nearly 60k in absolute terms (without regard to sign). Generally, the bias has been to the upside and ADP has tended to overstate payrolls by nearly 30k.
…For the Fed, it's the details that will ultimately matter Private payrolls are likely to return to trend in May in our view, with the +175k that we forecast close to the +172k per month averaged over the past year. While today's number argues that our forecast could go a bit higher, what will really matter for the Fed are the details of the report rather than some movement (unless strikingly drastic) in either direction of the headline figure. The unemployment rate, participation rate, and hourly earnings for example will be watched very closely
June 1, 2017
Rate Strategy
Rates Express
Continue to Focus on Earnings, not Payrolls We expect the 10yr Treasury yield to move 2-3 bps per 0.1% “miss” in average hourly earnings The 2yr yield should be a little less sensitive, say 2 bps per 0.1% miss. These estimates are in line with earnings implied betas over the past six months: 0-7 bps for the 10yr (Figure 1) and 0-5 bps for the 2yr (Figure 2). During this time, the payrolls beta often has had the “wrong” (negative) sign. The implied beta is the change in the Treasury yield divided by the actual minus consensus expectation for payrolls or earnings. For payrolls, we scale the beta to be the yield change per 100,000 “miss,” while the earnings beta is per 0.1 miss.
