Wednesday, May 30, 2018
So the markets took a bath in red sauce yesterday, following weekend drama regarding the difficulties Italy faces with a hung parliament, leading to fears that the third largest economy in the European Union will voluntarily exit the EU — “Italexit,” to coin a phrase. The led to further game theory that said instability in the EU as a whole may eventually lead to a breakup of the Eurozone overall.
But we are a long way from there; it’s far too early to be a true believer in the destruction of the EU. We see this in the pre-market rebound this morning, with much of the losses from Tuesday being buoyed back up in early trading today. And, as Zacks Exec VP Kevin Matras said earlier today: “Stocks Struggled Yesterday, but Italy’s Woes Overblown”
Also this morning we see new economic data to help lead new market narratives now that Q1 earnings season is passed, and ahead of the Fed’s expected quarter-point rate hike in the next couple weeks. The two main headlines in this regard today — the second read on Q1 GDP and the ADP ADP private-sector payroll survey — are both lighter than expected.
Starting with the ADP numbers for May, which as usual hit the tape ahead of the big non-farm payrolls and unemployment read Friday, we saw a total of 178K new private-sector jobs for the month. This is beneath the expected 187K among a consensus of analysts, and April’s headline was revised way down by 41K new jobs to just 163K total. I say “just” 163K, though in reality this is still consistent with a healthy employment market in the private sector. But ratcheting this far down from a psychologically pleasing 204K last month is worth noting.
The Services sector again led the way with 114K new jobs in May, but Goods-producing jobs performed very well compared to recent history with 64K jobs. The Construction industry outperformed all others for the month with 39K, and Manufacturing also pulled its weight with 14K new jobs. Trade/Transportation marked the biggest disappointment, with a loss of 23K new jobs for May.
What’s interesting about this number is that Trade/Transportation has been among the biggest growth industries for new jobs over the past quarter or longer, and even led all industries back in March. Trucking, rail and logistics may all play a part in the pullback, and it may suggest higher inventories have put some slack in supply and demand. Trucking, in particular, is also one of those industries having trouble finding enough skilled labor to fill open positions — as such, it would give credence to economists’ views that a tight labor market will result in employment strains for certain industries.
Q1 GDP was taken down 10 basis points this morning on the second read to 2.2%. Even though we see strong business investment (+9.2% in the quarter), personal consumption came in at a paltry 1%, falling from its initial read. If we may be so bold as to try and wring a narrative from this, take a look at the big corporate tax cut boon from early this year: businesses are feeling strong and putting their extra capital to work, whereas most individuals have not felt the wealth effect as of Q1 2018.
Looking ahead to Q2 GDP, things improve markedly: an average estimate of 3.4% for our current quarter is very healthy, especially for an economy of the U.S.’s size, and also helps soften the blow of the 2.2% in seasonally slower Q1. For those looking for the first +3% full-year GDP in many years (the recent high was +2.9% in 2015), quarterly growth around three-and-a-half percent for the next three quarters should get us there, and then some. It will be interesting to see if a cap emerges due to the aforementioned skilled-worker strain.
Considering how this may affect the Fed’s decision to raise interest rates next month, which is pretty well baked into everyone’s expectations right now. Another quarter-point raise will bring the federal funds rate to a range of 1.75-2.00%, marking the first time since before the Great Recession to see interest rates with a 2-handle.
This would also be the second hike in calendar 2018, with possibly two more to go in the back-half of the year. However, odds of both a third and fourth rate hike have fallen recently, however, possibly with one eye on the situation in the Eurozone. But for now, the U.S. is doing its part leading the way in economic strength.
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