Weekly Market Update: US Jobs Recovery on Track, ECB Cuts Rates
- US, European and Japanese equity markets pushed out to all-time or near all-time highs this week, while yields on US and German benchmark 10-year notes have moved away from the one-year lows seen last week. The week was all about the landmark ECB decision and another above-200K number in the US non-farm payrolls. The ECB cut its three key rates at the decision on Thursday, most notably putting the deposit facility in negative territory for the first time ever, and announced a package of measures to ensure funding finds its way to the real economy. In the US, five years into the economic recovery, total payrolls have finally passed their pre-recession 2008 highs. All in all, the US economy lost 8.7 million jobs during the Great Recession and today total employment is about 98K jobs above the prior high, at around 138.46 million. Chinese equity markets were pretty much flat on the week as HSBC and official PMI data offered contrasting pictures of the nation's economic pulse. For the week, the DJIA gained 1.2%, the S&P500 added 1.3% and the Nasdaq surged 1.9%. The German DAX hit the 10,000 mark for the first time in the moments after the ECB policy decision.
- The May payrolls were more or less as expected at +217K, but lower than the revised 282K April figure. The long-term unemployed showed signs of getting work, with people unemployed more than 26 weeks falling 78K and those unemployed 15-26 weeks declining 92K. The average workweek was unchanged at 34.5 hours as expected, but hourly earnings were slightly stronger than anticipated.
- The ECB cut its three key rates at the decision on Thursday, most notably putting the deposit facility in negative territory for the first time ever, charging banks for holding their money. The central bank also announced additional measures to push banks to funnel more money into the real economy: it extended the fixed-rate full allotment MROs by 18 months to the end of 2016, suspended SMP sterilization (which was failing anyhow) and teed up two more LTROs. In addition, the ECB reiterated that it was continuing work to set up an ABS repurchase facility. Draghi insisted this was not the end of the measure the ECB was willing to undertake to support the eurozone economy and emphasized that the council would take any action within its mandate to achieve price stability, including possible large-scale asset purchases. Since the decision, the Bundesbank's Weidmann and several other ECB figures have emphasized that no more ECB actions will be taken until there is time to assess the economic impact of this week's policy changes.
- There has been plenty of skeptical analysis of the ECB's new measures. The new TLTROs (targeted longer-term refinancing operations) reprise the ECB's prior three-year LTRO operations, launched in December 2011 and February 2012 to cope with the euro crisis. Nearly all of the €1.02T in funds allotted at that time was invested in sovereign bonds, and this time around Draghi promises ECB oversight will keep the funds flowing into the real economy. Skeptics suggest this will be difficult, as demand for lending rather than a shortage of funds appears to be one of Europe's chief problems. As of today, only €554.6B from the first two LTROs has been paid back, which is only a little more than the total €400B TLTRO funding. According to Deutsche Bank, in a sense the new LTROs could be construed as a four-year extension of the existing LTROs, at a lower cost. There is also doubt about negative deposit rates, as European banks' deposits at the ECB have fallen close to zero in the past several months and reserve holdings at the ECB (to which negative rates will also apply) have also diminished significantly. Big European banks with global reach could also simply park more of their funds in the Fed via their US branches.
- The US placed a fresh round of duties on imported Chinese solar products. The move comes SolarWorld AG filed a petition complaining that Chinese manufacturers sidestepped earlier duties by shifting production to Taiwan. The new import duties cover panels made with parts from Taiwan. Chinese solar names saw steep losses on the news. In other trade conflict news, there were reports that China was preparing to cancel rare earth export tariffs in order to comply with WTO rules, after the world trade body ruled in March that Beijing's huge tariffs were a violation of its rules.
- As expected, President Obama unveiled proposals to slash carbon emissions for existing power plants. The President promised to use his executive authority propose new EPA rules that would cut carbon emissions from the country's coal fired plants by up to 30% by 2030. The new rule is expected to be finalized next year, setting the first national limits on CO2 and bypassing Congress. The proposal would give states some flexibility in meeting the targets.
- US May auto sales clearly showed an explosion of pent-up demand, contrasting sharply with very modest results seen in April. Chrysler's sales jumped 17% y/y in May, GM sales surged 12.6%, about twice the expected growth. Ford sales were also a bit better than expected, and in all the industry annualized total US vehicle sales rate (SAAR) for May hit 16.77M, well above a 16.1M expectation.
- There were no big surprises at Apple's WWDC developers' conference on Tuesday, disappointing some Apple adherents who are anxious to see the invention of the next consumer product category. Apple rolled out a new version of its OS X operating system and gave a sneak peak of iOS 8, including the new HomeKit and HealthKit developer platforms. As the names suggest, they provide frameworks for development of health and home management apps, seen as the next big opportunity for wireless devices.
- AT&T raised its full-year revenue forecast for a second time, citing strong growth in its wireless business. The firm offered a range of Q2 metrics guidance, and forecasted net postpaid wireless subscriber additions would exceed 800K, compared to 625K in Q1 and 551K in Q2 of 2013, which was the company's best Q2 postpaid net adds figure in four years. AT&T said it would sell 3.2M smartphones in the quarter under its new AT&T Next program, which lets customers get a new device every 12-18 months when paying a monthly installment plan.
- Unconfirmed reports detailed Sprint's courtship of T-Mobile, a week after press stories that said T-Mobile parent Deutsche Telekom gave Softbank a green light for Sprint to go after its US unit. Sprint's offer would be a 50/50 cash and stock deal, priced at approximately $40/share for an implied deal value around $32.2B. An RBC analyst aired some skepticism about the prospects of the merger garnering FCC or DoJ approval, and said that Dish could come in with a counter offer. The contest for Hillshire Brands continued, as Pilgrim's Pride boosted its offer to $55/share from $45/share prior, beating out Tyson Foods' own improved $50/share offer from late last week. After receiving the latest bid, Hillshire's board has authorized official negotiations with both Tyson and Pilgrim's Pride under language in its standing merger agreement with Pinnacle Foods. Both offers are conditioned on the termination of Hillshire's pending deal to acquire Pinnacle Foods.
- The euro was on the defensive all week leading up to the rate decision on Thursday, with EUR/USD pivoting around 1.3615. Expectations for ECB action were cemented by the advanced Eurozone May CPI reading, after the data missed expectations (0.5% v 0.6%e), matching the March reading, which was the lowest level in the series since November 2009. The preliminary German May CPI dropped below 1%. After the ECB decision, EUR/USD hit four-month lows at 1.3500 but stayed above the key January low of 1.3477.
- USD/JPY rose to one-month highs around 102.80 on Tuesday after data showed that Japan April earnings rose 0.9% y/y, their highest level in two years, and Australia first quarter GDP rose to +3.5%, its fastest pace of expansion in two years. The RBA left its cash rate target unchanged in Tuesday's decision, flatfooting markets that had been factoring in a small chance of a rate cut. AUD/USD rose to two-week highs around 0.9355 on Friday.
- China's official May PMI figures registered another month of steady improvement. Manufacturing expanded for the third consecutive month and hit a five-month high of 50.8, helped by strong gains in the new orders and input prices components. Non-manufacturing hit a six-month high of 55.5. HSBC data were slightly less impressive despite the "mini-stimulus" focus on smaller enterprises: manufacturing PMI slowed to 49.4 - its 5th month of contraction - and services hit a 4-month low of 50.7. According to HSBC's chief China economist, the data clearly shows China's recovery momentum is slowing and policymakers will need to further ease monetary and fiscal policy to help support growth. Remarks from the IMF's Lipton late in the week were slightly more sanguine. He suggested worries over mainland slowdown are exaggerated but also called for the 2015 GDP target to be lowered to 7.0% to achieve a more "sustainable" growth rate. Investors are staying tuned for more May economic data next week, starting with the trade figures out over the weekend.
- Japanese PM Abe continues to press forward with his ambitious reform agenda. Following a series of meetings, both the Finance Ministry and the LDP Tax Panel have now acquiesced to Abe's push for lower corporate taxes provided there is a new stable source of revenue to compensate for the shortfall. Japan's current rate of 35%+ is substantially higher than the average among developed economies and the new head of Keidanren - Japan's powerful business lobby - has already expressed his desire to see them closer to 25%. On Friday, Abe also requested Health and Welfare minister Tamura to make a more concerted effort on GPIF pension fund reform to increase its investment in the stock market. Decisions on portfolio guidelines are expected at the end of the year, however Abe is aiming for that review to be completed by September or October. Japan's latest updates on economic and monetary policy are also on tap for next week - Q1 final GDP data will kick off the week's data while the BOJ policy statement will be announced on Thursday.