- Markets express optimism that UK will vote to remain in EU
- U.S. consumer sentiment expected to edge a bit lower in late June after May’s surge
- Durable goods orders expected to be weak
Markets express optimism that UK will vote to remain in EU — The final results of the Brexit vote were expected by 2 AM ET on Friday morning, meaning the markets by Friday’s open should have a definitive answer about whether the UK voted to remain in or leave the EU. Going into yesterday’s election, the public opinion polls were dead even but the betting odds heavily favored the UK staying in the EU by a margin of about 75%-25%.
Sterling rallied sharply on Thursday and global stocks were strong as the markets expressed confidence that the UK would vote to Remain. The markets seemed to be basing their opinion mainly on the betting odds rather than the dead heat in the opinion polls. However, large hedge funds also commissioned their own public opinion polls and even conducted exit polling, which suggests that the large hedge funds had strong private information suggesting that the UK would vote to Remain. The downside, of course, is that if UK voters in reality voted to Leave the EU, then the markets set themselves up for a very steep decline on that surprise vote.
If the UK indeed voted to stay in the EU, that would be a clear victory for Europe. Still, the UK Brexit vote once again laid bare the thin underpinnings of the European integration experiment. Even aside from Brexit, Europe remains in a difficult position with lackluster economic growth, poor national fiscal situations, and a stressed European banking system.
In addition, even if the UK voted to remain in the EU, the Brexit vote itself encouraged populist politicians across Europe to foment euro-skepticism and possibly even force their own Leave referendums. The vote for the UK to leave the EU was bad enough, but what would be much worse is if a Eurozone country voted to leave the euro area and give up its use of the euro. An exit by a Eurozone country would be a crisis of another magnitude for Europe compared with Brexit.
If the UK indeed voted to remain in the EU, then the markets can go back to focusing on actual macroeconomic fundamentals. On that note, the situation in Europe should theoretically improve somewhat post-Brexit as uncertainty recedes and businesses can go back to their normal investment and hiring routines without worrying about the possibility of the UK leaving the EU. If the UK voted to remain in the EU, then the ECB will not be forced to pull any new stimulus measures out of its hat, at least not any time soon.
In the U.S., Fed Chair Yellen said that a Brexit Leave vote could have a significant negative impact on the U.S. economy. If the UK instead voted to remain within the EU, then the Brexit uncertainty will at least be removed from the Fed’s radar screen and the Fed can go back to focusing mainly on U.S. domestic concerns.
Regarding the U.S. domestic situation post-Brexit, the markets will mainly be looking ahead to the June unemployment report to be released on Friday, July 8. That report will have a heavy influence on the U.S. economic outlook and on Fed policy. The markets are very concerned about the downtrend in hiring after payroll growth fell from Feb’s strong level of +233,000 to +186,000 in March, +123,000 in April, and +38,000 (+73,000 ex-Verizon strike) in May.
Indeed, the weak May payroll report shook the Fed’s confidence and sent the FOMC hawks into hibernation, at least temporarily. If there is another weak payroll report for June, then speculation will ramp up about the possibility of a recession by year-end. On the other hand, if the June payroll report can strengthen back to at least the +150,000 area, then the spate of weak payroll reports in April-May will look more like just a temporary hiring slowdown in reaction to the weak GDP growth rates in Q4 and Q1.
U.S. consumer sentiment expected to edge a bit lower in late June after May’s surge — The market is expecting today’s final-June U.S. consumer sentiment index from the University of Michigan to show a small -0.2 point decline to 94.1 from the preliminary-June level of 94.3, leaving the final-June index down by -0.6 points from May rather than the preliminary-June decline of -0.4 points. The U.S. consumer sentiment index in May showed a sharp +5.7 point increase to a 1-year high of 94.7, which means the small decline seen in early June was not surprising. U.S. consumer sentiment remains generally strong but there are threats including the slow rise in gasoline prices, the toxic presidential campaign, and the recent downtrend in hiring.
Durable goods orders expected to be weak — The market is expecting today’s May durable goods orders report at -0.5% and +0.1% ex-transportation, weakening from April’s report of +3.4% and +0.5% ex-transportation. Durable goods orders ex-transportation remain weak and were down by -1.2% y/y in April, the 15th consecutive month of a year-on-year decline. U.S. manufacturing executives are not particularly optimistic about the orders picture. The ISM manufacturing new orders sub-index rose by +6.8 points to a 1-1/2 year high of 58.3 in March but then faded by -2.5 points in April and by -0.1 points in May to 55.7.
Meanwhile, May capital goods orders nondefense ex-aircraft, a proxy for corporate capital spending is expected to show a +0.4% increase today, recovering part of April’s -0.6% decline. The series was down by -4.4% y/y in April, the 15th consecutive month of a year-on-year decline. U.S. corporations are clearly not very interested in new capital spending considering the weak U.S. and global economic outlook.
