The Market Today
ISM Non-Manufacturing and U.K. Election The Focus in an Otherwise Quiet Week
by Craig Dismuke, Dudley Carter
This Week’s Calendar – Light with ISM Report and U.K. Election in Focus: This week’s economic calendar is light with one primary and several secondary reports. The primary report will be released today at 9:00 a.m. CT, the May ISM Non-Manufacturing Index. The index is expected to show a slight tick lower after a strong April report. Covering a very broad swath of economic activity in the U.S., the report will be a key variable heading into next Wednesday’s FOMC decision. In the early morning data, the final revision to 1Q nonfarm productivity showed productivity revised up from -0.6% to unchanged for the quarter. As a result, unit labor costs were revised down from +3.0% for the quarter down to +2.2%, another indication of weaker wage growth. Also released today will be the May Labor Market Conditions Index (9:00 a.m.), April Factory Orders (9:00 a.m.), and the final revision to the April Durable Goods Orders report (9:00 a.m.).
As for the remainder of the week, the JOLTs job openings report will be released Tuesday, consumer credit on Wednesday, the Fed’s Household Flow of Funds report on Thursday, and April’s wholesale inventories report on Friday. Leading into next week FOMC meeting, there are four scheduled reports/events which could change the Fed’s decision. They include this morning’s ISM Non-Manufacturing Index, next week’s Retail Sales and CPI inflation reports, and Thursday’s U.K. election. The Fed has fairly clearly signaled another 25 basis point hike next week and it will take very disappointing data to derail that. It seems unlikely that the U.K. election could alter the path barring any volatile market reaction. It appears the Brexit path will be reaffirmed with a smaller majority than in the initial vote. The most likely alternative outcome would be that Brexit has even less support forcing negotiations with the EU to be more moderate. Either result is likely to ease financial conditions rather than tightening them.
Overnight Activity – Stocks off to a Weak Start, Treasury Yields Rise after Friday Rally: Global equities are off to a subdued start and sovereign yields are modestly higher in a week where markets are likely to be swayed more by politics and monetary policy than economic data. A quiet economic calendar in the U.S. and Europe could be overshadowed by former FBI Director Comey’s testimony before the Senate Intelligence Committee, the ECB’s latest monetary policy decision, and parliamentary elections in the U.K., all of which are scheduled for Thursday. As to today, European equities are in negative territory after Asian exchanges notched daily losses. The losses in Japan and China developed even as each country’s May Services PMI showed improvement to multi-month highs; Japan’s was the strongest since August 2015. In Europe, the Eurozone’s May Composite PMI held at 56.8 in final revisions but the U.K.’s dropped to a three-month low. Despite the equity weakness, sovereign yields are modestly higher. The 2-year Treasury yield was 0.6 bps higher at 1.29% and the 10-year yield rose 1.6 bps to 2.18%, only partially undoing Friday’s post-payroll downshift. Equity futures are off 0.1%. As has been the case with recent terrorist activity, markets have shown no lasting impact of the latest attack Saturday in London.
Last Week’s Recap: The Treasury Curve traded last week to its flattest level since October 5. Yields were only modestly changed before Friday’s disappointing nonfarm payroll report sparked a rally on the longer end of the Treasury curve. Shorter yields held mostly steady as markets continue to expect another rate hike to occur in June. Despite the sour signals from the fixed income market, stocks climbed to new all-time closes after the labor data. Click here to see the full recap.