Market Briefing: Dollar Strengthens into Month End
As the last trading day of the month begins, it’s clear that equity investors aren’t following the “sell in May and go away” dictum, but others are growing more cautious on an increasingly-bifurcated worldwide growth outlook. US Treasury yields - standing in for US growth expectations - continue to climb, while oil prices - a proxy for global demand - are broadly lower, with both key benchmarks down almost 3-percent overnight and off nearly 10 percent for the month.
The trade-weighted dollar looks set to end the month having gained nearly 2.75 percent, with higher US yields and increasing scepticism on the worldwide growth outlook helping it steamroll all of its major rivals and defy sell-side rate forecasts. Although month-end flows are pushing the pound and euro higher, both are poised to post May losses, with sterling seeing a -1.6-percent retracement and the common currency losing more than 3 percent. The Canadian dollar continues to lag the greenback while outperforming its global counterparts, posting a more modest -0.4-percent loss for the month as an improvement in North American financial conditions helped ease fears within the country’s all-important housing sector.
Further evidence of a slowdown in the Chinese economy emerged overnight as official activity gauges pointed to slumping demand in both domestic and export markets. The country’s manufacturing purchasing manager index unexpectedly fell to 48.8 in early May from 49.2 in April, defying hopes for a modest improvement, while services activity slumped from 55.1 to 53.8, helping demolish hopes for an offsetting consumer-led rebound. The construction subindex fell to 58.2 from 63.9 in April, suggesting that the government’s half-hearted attempts to ease lending conditions and boost infrastructure spending are failing to drive a sustained rebound in the property sector - which has become (depending on your view on valuations) the world’s single biggest asset class, dwarfing US real estate, equity, and bond markets. The data are likely to force a downward adjustment in Chinese growth expectations, and will weigh on commodity prices across the curve.
After the House Rules Committee narrowly approved moving the proposed debt ceiling plan to the floor for debate, a vote is expected to come this evening. With concerted opposition emerging among the ultraconservative Republican Freedom Caucus and some on the far left of the Democratic Party, more moderate representatives are likely to form a makeshift cross-aisle coalition in order to advance the measure to the Senate and avoid a default by June 5. Markets remain broadly unconcerned, following Churchill's (possibly apocryphal) aphorism: "You can always count on the Americans to do the right thing... after they have tried everything else."
Still ahead today, Statistics Canada is expected to confirm a modest -0.1-percent contraction in gross domestic product during the month of March, with a preliminary estimate for April pointing to further weakness as public sector employees went on strike. The US Job Openings and Labor Turnover Survey should show a continued decline in vacant positions, with March’s 9.6 million slipping to 9.5 million in April. Federal Reserve governor Bowman will speak just before 9, Boston’s Collins at noon, Philly’s Parker at 1:30, and governor Jefferson at 1:30.
Tomorrow’s weekly jobless claims number could help calibrate expectations ahead of Friday’s non-farm payrolls report, but as far as we can tell, there’s little to indicate that the US jobs creation engine is grinding to a halt. Economists think at least 175,000 jobs were added last month, but any print above the 150,000 mark should add to hot inflation, growth, and financial conditions data in helping ratify market bets for a rate increase at the June 13-14 meeting.
CAD Gross Domestic Product, Q1
CAD Gross Domestic Product, March
USD Job Openings and Labor Turnover Survey, April
USD Dallas Federal Reserve Services Activity, May
USD Federal Reserve Beige Book
CNY Caixin China Purchasing Manager Index Manufacturing, May
EUR S&P Global Eurozone Manufacturing Purchasing Manager Index, May Final
EUR Consumer Price Index, May Preliminary
EUR Unemployment Rate, April
BRL Gross Domestic Product, Q1
USD ADP Employment Change, May
USD Weekly Jobless Claims
USD S&P Global US Manufacturing Purchasing Manager Index, May Final
USD Institute for Supply Management Survey, May
MXN Bank of Mexico, Monetary Policy Minutes
USD Department of Energy Weekly Inventories
USD Non-Farm Payrolls, May
USD Unemployment Rate, May
USD Labor Force Participation Rate, May
USD Baker Hughes Weekly Rig Count