U.S. May service-business confidence expected to improve
U.S. job openings expected to fall from record high but remain strong
Italian confidence vote expected today to confirm the new government
China May PMIs remain in stable shape
U.S. May service-business confidence expected to improve — The consensus is for today’s May ISM non-manufacturing index to show a +0.8 point increase to 57.6, recovering somewhat after falling for three straight months (Feb-April) by a total of -3.1 points. Despite that 3-month decline, service business confidence remains in good shape at only -3.1 points below the 12-3/4 year high of 59.9 posted in January.
The Markit U.S. services PMI in early-May rose by +1.1 points to 55.7, which bodes well for today’s ISM report. Today’s final-May Markit services PMI is expected to be left unrevised at 55.7.
U.S. service business confidence is expected to recover in May after the 3-month stretch of losses that were tied in part to trade tensions, stock market weakness, and soft consumer spending in Q1. Trade tensions and tariffs continue to be a concern, but less so for service businesses than for sellers of physical products. Higher fuel costs and higher interest rates are another source of concern for many businesses.
Despite those concerns, U.S. business confidence in general remains strong due to (1) the firm U.S. economy, (2) expectations for a recovery in U.S. consumer spending in Q2, and (3) the Jan 1 tax cuts.
U.S. job openings expected to fall from record high but remain strong — The consensus is for today’s April JOLTS job openings report to show a decline of -290,000 to 6.350 million, reversing part of March’s +472,000 surge to 6.55 million. U.S. job openings are in stellar shape after reaching a record high of 6.55 million in March. The strength in job openings is a favorable leading indicator for the payroll report since many job openings will turn into an actual job hire in 1-3 months, as long as a suitable person can be found for the job.
The stock market is still benefiting from last Friday’s stronger-than-expected payroll report of +223,000 and the dip in the May unemployment rate to match a 48-year low of 3.8%. The strength in the labor market shows that businesses remain optimistic about the future and are looking to hire even more employees. As long as the labor market remains strong, businesses are eventually going to be forced to pay their employees substantially higher wages. Last Friday’s report showed that May average hourly earnings edged higher by +0.1 point to +2.7% y/y, which was only -0.1 point below January’s 9-year high of 2.8%.
Italian confidence vote expected today to confirm the new government — Italy’s new government, led by Prime Minister Conte, is expected to be confirmed today with a confidence vote in parliament. The coalition has a majority of seats in both houses of parliament, meaning today’s vote should be a formality without any drama for the markets.
Separately, PM Conte said on Monday that he plans to hold a bilateral meeting with German Chancellor Merkel on the sidelines of the Friday/Saturday G-7 summit in Quebec. Mr. Conte is starting his role as the face of the populist Five Star and League parties, which are looking to challenge some of the fundamental principles of the Eurozone. Ms. Merkel in her meeting later this week with Mr. Conte will have her lecture ready about the need for Italy to follow the Eurozone’s fiscal rules, but she must be careful not to cause even more hostility in Italy towards Germany and the EU and risk further boosting the popularity of the populists.
A poll published over the weekend showed that the League’s support has surged by 12 points to 29% from 17% at the March election, while Five Star’s support fell slightly by 2 points to 30% from 33%. Most of the League’s higher support came at the expense of the establishment parties, particularly Berlusconi’s center-right Forza Italia party. While Five Star has many more seats in parliament than the League, the League can claim to nearly be an equal partner based on the current polls and where the seats might end up if a snap election needs to be called.
Italy’s 10-year bond yield on Monday fell by another -15 bp to 2.52%, now down by a total of -63 bp from last Tuesday’s 4-year high of 3.15% bur still far above the 1.80% level seen just three weeks ago. The 10-year Italy-German bond yield spread on Monday fell by another -18 bp to 212 and is down by -78 bp from last Tuesday’s 3-3/4 year high of 290 bp.
China May PMIs remain in stable shape — China’s PMI reports in May were stable to higher and suggested that the Chinese economy is maintaining its momentum. China’s manufacturing PMIs in May were steady to higher. The Caixin index was unchanged at a 3-month high of 51.1, while the National Bureau of Statistics’ (NBS) Chinese manufacturing PMI rose by +0.5 points to an 8-month high of 51.9.
On the services side, the NBS’s Chinese non-manufacturing index was reported last week at +0.1 to a 4-month high of 54.9. Meanwhile, Caixin on Monday night was expected to report that its Chinese May services PMI would be unchanged at 52.9, remaining comfortably above 50.0.
The Chinese economy by most accounts remains in stable shape. The Chinese government is trying to clamp down on excessive borrowing and overcapacity in many industries without causing a significant slowdown in growth. Chinese GDP growth in Q1 was unchanged for the third straight quarter at +6.8% y/y. However, the consensus is for Chinese GDP growth to ease slightly to 6.6% in Q2, 6.5% in Q3, and +6.4% in Q4. On an annual basis, the consensus is for Chinese GDP to slow from +6.9% in 2017 to +6.5% in 2018, +6.3% in 2019, and +6.2% in 2020.