- Unemployment claims expected to remain favorable
- Chicago PMI expected to halt 2-month decline
- Is the Brexit sell-off over already?
Unemployment claims expected to remain favorable — The market is expecting today’s weekly initial unemployment claims report to show a +8,000 gain to 267,000, reversing about one-half of last week’s -18,000 decline to 259,000. The market is expecting today’s continuing claims report to show a +9,000 increase to 2.151 million, reversing about one-half of last week’s -20,000 decline to 2.142 million.
U.S. unemployment claims remain in relatively good shape and are not indicating any significant pick-up in layoffs. Initial claims are only +11,000 above the 42-1/2 year low of 248,000 posted in April and continuing claims are only +30,000 above the 15-3/4 year low of 2.124 million posted two weeks ago. However, the markets will closely watch today’s unemployment claims data for any signs of a pick-up in layoffs as part of a wider potential weakening of the labor market. The markets remain 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.
Chicago PMI expected to halt 2-month decline — The market is expecting today’s June Chicago PMI index to show a +1.7 point increase to 51.0, more than reversing May’s -1.1 point decline to 49.3. The Chicago PMI has fallen by a total of -4.3 points in the past two reporting months of April-May to post the 5-month low of 49.3 and fall below the expansion-contraction level of 50. On the national business confidence front, the market is expecting this Friday’s June ISM manufacturing index to show a small +0.2 point increase to 51.5, adding to May’s +0.5 point increase to 51.3.
Is the Brexit sell-off over already? — The world stock markets have recovered somewhat in the past two sessions after the sharp Friday/Monday sell-off seen on last Thursday’s Brexit vote. Sterling on Tuesday and Wednesday recovered mildly by +1.5% after the -10% plunge on Friday and Monday to a 30-year closing low of $1.3225. The FTSE 100 index has recovered by +6.3% from Monday’s 2-week low close and actually closed above the level seen last week before the surprise Brexit vote. The Euro Stoxx 50 index rallied by +5.0% on Tue/Wed after the -11.2% sell-off seen on Fri/Mon. The Euro Stoxx Banks index rallied by +5.0% on Tue/Wed after the -23.1% plunge seen on Fri/Mon. The S&P 500 index recovered by +3.5% on Tue/Wed after the -9.1% sell-off seen on Fri/Mon. While the initial sell-off appears to be over with for now, that could simply turn out to be the first leg down of a larger sell-off.
The UK markets in particular are likely to see ongoing weakness in coming weeks and months as Brexit uncertainty leads to a likely UK recession and a sharp drop in business and consumer confidence. The bigger question is whether the Eurozone economy will be able to avoid a recession from Brexit uncertainty. The other big question is the effect of the Brexit uncertainty on the UK and European banking systems and the impact on the rest of the world including the U.S. The fall-out from Brexit has clearly yet to be assessed.
The post-Brexit turmoil is particularly acute because the Brexiteers in the British government clearly have no plan about how to execute Brexit and are back-peddling from their previous exaggerated promises of what could be achieved with Brexit. The Dutch premier, Mark Rutte, put it starkly by saying that “England has collapsed politically, monetarily, constitutionally and economically.”
The first order of business in the UK is for the Conservative Party to appoint a new leader to become the new Prime Minister and take over from current PM David Cameron who resigned Friday after the Brexit vote. Conservative Party officials have said they intend to have a new PM in place by early September. That means that essentially nothing will happen on Brexit until early September. Mr. Cameron has said that he will leave to his successor the task of invoking the Article 50 notification of the UK’s intent to withdraw from the EU. The EU wants the UK to invoke Article 50 very soon after choosing a new PM in September, which suggests a timing of mid to late September. Once Article 50 is invoked, the clock will start ticking on the 2-year period that is specified for EU exit negotiations. If there is no agreement after two years, the parties can agree to extend the time period or the EU could just let the UK lapse out of the EU. The key for the EU to reduce Brexit uncertainty is to get the UK to at least invoke Article 50 as soon as possible.
Meanwhile, the UK is now up against German Chancellor Merkel as the EU’s primary negotiator, who clearly intends to deal sternly with the UK. Ms. Merkel stared down the Greek government and forced it to accept the austerity terms rejected by its citizens in a referendum and she appeared willing to otherwise allow the complete collapse of the Greek economy and banking system. Ms. Merkel will be playing hardball with the UK as well regardless of whatever conciliatory words she might use to dampen financial market fears. Ms. Merkel already said that she sees no way back from Brexit now and there will be no cherry-picking for the UK in the Brexit negotiations. The UK in the end will likely get a Brexit deal that will be very disappointing to the Brexiteers and the UK citizens who voted for Brexit.
The UK at the end of the day will be a big loser from Brexit, with the only real question being the extent to which the UK drags down Europe and the rest of the world along with it.
