THE DAILY EDGE: 7 JUNE 2019

Payroll employment edges up by 75,000 in May; unemployment rate remains at 3.6%

• Total nonfarm payroll employment edged up in May (+75,000). Monthly job gains have averaged 164,000 in 2019, compared with an average gain of 223,000 per month in 2018.
• The change in total nonfarm payroll employment for March was revised down from +189,000 to +153,000, and the change for April was revised down from +263,000 to +224,000. With these revisions, employment gains in March and April combined were 75,000 less than previously reported.

• In May, average hourly earnings for all employees on private nonfarm payrolls increased by 6 cents to $27.83. Over the year, average hourly earnings have increased by 3.1 percent. Average hourly earnings of private-sector production and nonsupervisory employees increased by 7 cents to $23.38 in May. [+3.4%]
• The average workweek for all employees on private nonfarm payrolls was unchanged at 34.4 hours in May. In manufacturing, the average workweek and overtime hours were unchanged at 40.6 hours and 3.4 hours, respectively.

As Mexico-U.S. talks progress, markets rise on hopes a deal could be close  Mexican and U.S. officials held a second day of talks on trade and migration on Thursday, with markets rebounding on optimism a deal could be close, although it was unclear if Mexican pledges to curb migration flows were enough to persuade the Trump administration to postpone tariffs.

(…) U.S. Vice President Mike Pence said Mexico had offered “more” on Thursday than on Wednesday but that it would be up to Trump – who returns from a European trip on Friday – to decide if it were enough. (…)

• Trump Says Fed’s Rate Increases Restrained Stock Market Growth The president said the stock market would be 10,000 points higher had the Fed kept rates lower.

Trump did not specify if he meant the DJII or the S&P 500 Index.

Rise in U.S. Worker Productivity Could Be Difficult to Maintain U.S. workers’ efficiency improved at the best rate in nearly a decade, revised data confirmed, but that pace could prove difficult to maintain with economic growth expected to cool as the year progresses.

The productivity of nonfarm workers increased 2.4% from a year earlier in the first quarter, the Labor Department said Thursday. That was the best year-over-year gain since the third quarter of 2010, when the economy was just emerging from a deep recession.

Compared with the previous quarter, productivity increased at a 3.4% seasonally adjusted annual rate in the first quarter. That was a slight downward revision from last month’s initial estimate of a 3.6% gain. (…)

While the latest data show that worker efficiency has improved, the pace of gains is near average by historical standards. Since the end of World War II through 2018—including both expansions and recessions—productivity rose at an average annual rate of 2.1%. In the previous economic cycle, from 2000 to 2007, productivity rose at a 2.7% annual rate.

Thursday’s report showed compensation expenses, as measured by unit-labor costs, decreased at a 1.6% annual rate in the January-through-March period from the fourth quarter of 2018. That compared with an earlier estimate of 0.9% lower. (…)

This stat can be significantly revised so should be taken with reserves. As you can see, unit labor costs almost never decline YoY except immediately after recessions.

China has ‘tremendous’ room to adjust monetary policy if trade war deepens, PBOC head says: report

“We have plenty of room in interest rates, we have plenty of room in required reserve ratio rate, and also for the fiscal, monetary policy tool kit, I think the room for adjustment is tremendous,” Yi said, according to the news outlet. He said he expected a “productive talk, as always,” when he meets with Treasury Secretary Steven Mnuchin on the sidelines of the G-20 finance ministers meeting, but that the risk of a trade war remains “uncertain and difficult.”

Germany: Horrible start to the second quarter Disappointing April data from industrial production and trade suggest that the latest ECB’s dovishness is justified

Industrial production fell by a sharp 1.9% month-on-month in April, from 0.5% MoM in March, the first drop since January this year. On the year, industrial production was down by 1.8%. Production in all sectors dropped, except for activity in the construction sector.

At the same time, German exports (seasonally and calendar adjusted) fell like a stone, dropping by 3.7% MoM in April, from 1.6% MoM in March. Imports decreased by 1.3% MoM, from 0.4% MoM in March. As a result, the trade balance shrank to €17.94 billion in April from €22.6 billion in March.

Let’s be clear, this is a horrible start to the second quarter for German industry, as global trade tensions as well as temporary problems in the automotive sector and chemical industry have left their marks. One-off factors should have disappeared by now and even turned into temporary positives. (…) (ING) (Charts from Bloomberg and Markit)

MARKIT EUROPE AUTO AND PARTS PMI

Selling prices fall at copper users amid weak demand and low cost inflation

At 49.4 in May, the seasonally adjusted Global Copper Users Purchasing Managers Index™ (PMI) – a composite indicator designed to give an accurate overview of operating conditions at manufacturers identified as heavy users of copper – ticked up from 49.1 in April, to signal a similarly marginal deterioration in business conditions. The reading extended the current sequence of decline to six months, but indicated the weakest drop in this period. (…)

Demand weakness still gripped the global copper using industry in May, as the latest PMI data signalled another decline in new orders, albeit to the least extent for six months. This run of poor performance has finally prompted manufacturers to reduce their selling prices for the first time since August 2016, revealing the level of angst among businesses that markets may not recover in the short run. (…)

Euro-Area Consumers Gave Economy a Lift at the Start of 2019

Household expenditure jumped 0.5% in the first quarter, the most in a year, helping overall economic expansion accelerate to 0.4%. Investment and net trade also added to growth in the period, while there was a big drag — 0.3 percentage points — from inventories. (…)

Huawei Signs Contract To Build 5G Network In Russia

Huawei cuts or cancels orders to major suppliers after U.S. blacklisting: report

Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC) confirmed that orders from Huawei have declined after U.S. President Donald Trump imposed a ban on the Chinese company on national security grounds, according to the report.

Huawei has also downgraded its forecast for total smartphone shipments in the second half of 2019 by “about 20 per cent to 30 per cent” from the previous estimate, the Nikkei reported. (…)

Optical components maker Lumentum Holdings Inc. ceased all its shipments to Huawei, while U.S. chip maker Qorvo Inc. said it expects first-quarter revenue to take a US$50-million hit due to a halt in shipments to the Chinese company.

Huawei is allowed to buy U.S. goods until Aug. 19 to maintain existing telecoms networks and provide software updates to its smartphones.

SENTIMENT WATCH

Investors, Buy the Dips: Recession Worry Is Overblown for Now

It may be time for investors to stop worrying and learn to love the economic boom. The inevitable bust could be further off than is commonly believed, but it could also be more painful. (…)

But if the business cycle truly is getting stretched, the expansion could last a few more years. This suggests investors should continue to buy stock-market dips—a successful strategy for the past 10 years. (…)

Investors should stop obsessing about an imminent recession but start planning for a financial storm some time in the mid-2020s.

I rest my case.

That thing settled, some naysayers still remain:

• PMI surveys signal weakest global economic growth for three years

• Global PMI™ falls to lowest since June 2016, while future expectations hit a survey low
• Stalling manufacturing sector joined by weaker services growth
• Jobs and investment indicators fall amid rising risk aversion; price pressure also ease
• Developed world growth down to lowest since 2012 as US joins the slow lane
• Brazil downturn leads emerging markets lower

While the PMI had hinted at a modest pick-up in the pace of global economic growth in February and March, the data for the second quarter are looking decidedly gloomy, pointing to the weakest rate of expansion since the third quarter of 2016. The survey data are indicative of worldwide GDP rising at an annual pace of 2.0% (at market prices) so far in the second quarter, down from 2.4% in the first quarter, though momentum was lost to around 1.75% in May alone. (…)

A further loss of momentum is signalled for coming months via weaker new order inflows, falling backlogs of work and a drop in business expectations. Inflows of new work showed the smallest rise for three years, falling in manufacturing and growing at their slowest pace since mid-2016 in services. (…)

A major change in May was a weakened rate of expansion in the US, which joined the other major developed economies of the eurozone, UK and Japan in the slow lane to push developed world growth to its lowest since 2012. Emerging market growth also eased, reflecting a renewed downturn in Brazil and softer expansions in China and Russia. (…)

• David Rosenberg remains obsessed:

With a recession inevitable, now is the time for every investor to hold on to their hat

(…) Perhaps the most important data point this week, with due deference to the jobs report, was the number of times the Fed Beige Book used the word “uncertain” to describe the outlook – the most in six years. And in uncertain times, the private sector tends to boost its savings rates at the expense of spending growth, and those savings in turn gravitate to safe havens – one reason why bonds and gold have reasserted their traditional roles in uncertain times. (…)