The Market Today

Spending Bill Agreement ahead of Busy Week for Economic News

by Craig Dismuke, Dudley Carter

Busy Week of Economic News – Jobs, FOMC Meeting, French Election: This week’s economic calendar is packed with data and events. Both ISM reports will be released (Manufacturing index on Monday and Non-Manufacturing index on Wednesday). The ADP Employment report on Wednesday is expected to show a big jump in private payrolls in April as a precursor to Friday’s BLS reports. Also on Wednesday, the FOMC will conclude its May meeting. The markets do not expect a hike, pricing in just a 14% chance. However, the markets are pricing in a 68% chance of a hike at the June meeting. Any real news from this week’s FOMC meeting may come from the release of their Minutes three weeks later, in which we expect to see more discussion of the portfolio reinvestment discussion. On Friday, the April job’s data is expected to show nonfarm payrolls up 190k for the month with the unemployment rate rising from 4.5% to 4.6% and average hourly earnings holding at 2.7% YoY. If projections prove accurate, this would be a strong-enough report and keep expectations for a June hike high. Also worth watching will be the polling data leading up to Sunday’s final round of the French election. Currently, pro-EU Macron is leading anti-EU Le Pen by a 20-point margin.

Today’s Calendar – Income and Spending Disappoint but Drop in Inflation Lifts Real Figures: As for this morning’s data, the March income and spending data were weaker-than-expected which could lead to an unsurprising downward revision to the already weak 1Q GDP report. Personal spending was flat in March versus expectations that it rose 0.2% MoM. The February spending data was also revised lower from +0.1% to +0.0%. On a positive note, real spending ended its two-month period of contraction to expand 0.3% MoM. Prior to the report, several economists highlighted the historical correlation between three consecutive quarters of negative real spending and recessions. Personal income rose just 0.2% versus expectations of a 0.3% increase while February’s data were also revised lower from +0.3% to +0.2%. However, with the inflation adjustment being negative, real disposable income actually rose 0.5% in March, a solid result. The 0.1% drop in MoM core PCE was the largest drop since September 2001 and driven by a drop in autos, furnishings, apparel, and several categories within the services sector. Year-over-year core PCE inflation, the Fed’s preferred measure, fell from 1.8% to 1.6%. At 9:00 a.m. CT, the ISM Manufacturing index is expected to decline from 57.2 to 56.5. March’s construction spending data is also scheduled to be released, expected to show a slower pace of gains for construction spending. Treasury Secretary Mnuchin is speaking today in the media and at the Milken Institute Conference and will presumably talk about the proposed tax reform package.

Overnight Activity – Transitory Tranquility Delays What is Surely to be an Eventful Week: The overnight session has been a quiet one with many markets around the world closed for holiday breaks. But the calm to start the week is almost guaranteed to be fleeting considering the cornucopia of critical U.S. economic reports to be released over the next five days. The markets that were open generally had a positive underlying tone. The most notable news was Congress agreeing on a spending bill that will keep the government open for business through the end of September. Although subtle, the sigh of relief could be seen in the strength of the Dollar/Yen cross after the news hit the wires. Against a broader basket of currencies, the Dollar was little changed. Treasury yields are higher by less than 0.5 bp and equity futures are positive by 0.2% to 0.3%. In other news, China’s latest PMI reports softened but remained expansionary in April and U.S. crude prices continue to hover below $50 per barrel.

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