- U.S. payrolls are expected to recover to trend increase
- U.S. consumer credit expected to remain cool
- Fed speakers today may provide some color on FOMC policy discussions
- Macron expected to easily win Sunday’s French election
U.S. payrolls are expected to recover to trend increase — Last month’s March payroll report of +98,000 raised some concerns about whether the U.S. labor market was seeing some fundamental weakening. However, the March payroll report was likely caused by temporary weather-related factors such as (1) the fact that snowstorm Stella hit the Northeastern U.S. during the March payroll survey week, and (2) some payback after construction jobs were boosted in Jan-Feb by warmer than normal weather. Payrolls were strong at +216,000 in Jan and +219,000 in Feb, before falling to +98,000 in March.
The consensus is for today’s April payroll report to recover to +190,000, which would be very close to the trend average of +187,000 seen in 2016. Wednesday’s ADP report was positive for today’s payroll report since it showed a respectable increase of +177,000 and showed only a small 9,000 downward revision to 255,000 for March jobs.
If today’s April payroll report recovers to the +190,000 area, as expected, the markets will write off the weak March report and will looking forward to continued steady growth in the U.S. labor market. However, if today’s payroll report is substantially weaker than expected, then concerns will grow about whether the U.S. economy is seeing weakness extending into Q2.
There was also reduced concern about the weak March payroll report due to the strength seen in the household survey, which showed a strong +472,000 increase in employed persons, adding to the +447,000 gain seen in February. Those gains helped the March unemployment rate fall by -0.1 point to a 10-year low of 4.5%. The consensus is for today’s April unemployment report to back up a little by +0.1 point to 4.6%. The unemployment rate has already fallen to the 4.5% level that the Fed is forecasting for the steady-state rate for this year through 2019.
From the Fed’s perspective, there are still some concerns about the labor market with too many discouraged workers and long-term unemployed persons. However, the U.S. labor market has already essentially reached full employment and has met the Fed’s labor market policy goal.
The markets will carefully watch today’s wage data to see if wages are being pushed higher by the tight labor market. That higher income would give consumers a boost but would also cause inflation anxiety for the Fed. The consensus is for today’s April average hourly earnings report to show an increase of +2.7% y/y, unchanged from March. The average hourly earnings series is poised just -0.2 points below the 8-year high of +2.9% y/y posted in December. Last Friday’s employment cost index (ECI) report showed evidence that employees are gaining leverage for higher wages since the Q1 ECI rose by a 10-year high of +3.2% (q/q annualized).
U.S. consumer credit expected to remain cool — U.S. consumer credit seems to be downshifting a notch due to weaker consumer spending and some increased consumer debt distress. The consensus is for today’s March consumer credit report to show an increase of +$14.0 billion, a little below Feb’s report of +$15.2 billion. U.S. consumer credit growth in 2016 showed an average monthly gain of +$19.1 billion but downshifted to only $10.9 billion in Jan and $15.2 billion in Feb.
Looking at the breakdown, the growth in credit card debt (+6.2% y/y) and installment loans (+6.4% y/y) has roughly equalized. Credit card debt has picked up substantially from growth as low as +5.6% y/y a year ago, whereas installment debt has cooled off from levels as high as +8.0% y/y in late 2015. Installment loan growth likely took a hit in March due to the sharp drop in vehicle sales, which was due in part to bad weather.
Fed speakers today may provide some color on FOMC policy discussions — There are a raft of Fed speakers today who may provide some details on the FOMC’s discussions at its meeting earlier this week. Speakers today include Fed Chair Yellen, Fed Vice Chair Fischer, and regional Fed presidents Williams, Evans, and Rosengren. In particular, the markets are waiting to hear details on the Fed’s belief that the U.S. economy will rebound in Q2 after the weak +0.7% pace in Q1. The markets are trying to gauge the timing of the Fed’s next rate hike with the federal funds futures market discounting about an 80% chance of a rate hike at the next FOMC meeting on June 13-14. The markets are also eager to hear anything about the Fed’s discussions about changing its balance sheet policy.
Macron expected to easily win Sunday’s French election — There has been little change in the polling for this Sunday’s French election with centrist Emmanuel Macron leading far-right Marine Le Len by about 60-40% in the polling and 85%-19% in the betting odds (PredictIt.org). The French polls were very accurate for the first round of the French election and there is little to suggest that Ms. Le Pen at this point has any chance of making up a 20-point deficit in just two days to win. Still, there is a non-zero chance for a Le Pen victory and the markets must be ready for that possibility as well.
The French-German 10-year bond yield spread on Thursday dropped by 4.5 bp to a 4-1/2 month low of 43.5 bp, down sharply from the 69 bp level seen before Macron had a good showing in the April 23 first-round vote. The yield spread is still about 20 bp higher than the levels seen last year before concerns started to heat up about the French election. Meanwhile, the French 5-year credit default swap (the price of insuring against a French sovereign bond default) on Thursday fell to a 5-3/4 month low of 31.9 bp.
