With the Pacific G10 Macro Rates Team
Last week economic data joined fiscal and monetary authorities in driving financial markets, probably the first time since the start of the pandemic. The ECB surprised markets by extending the Pandemic Emergency Purchase Programme (PEPP) by EUR 600bn and announcing reinvestments. This led to a significant rally in the periphery vs. core countries, adding to the bullishness from an additional fiscal stimulus (including temporary VAT cut) announced by Germany earlier in the week.
The main event of the week was on Friday when the employment report in the US came out way better than economists’ expectations. The unemployment rate dropped to 13.3% almost 3% below the lowest estimate on the Bloomberg survey of 16%. This added to the optimism coming from the signs of economic recovery in other data. The vast majority of jobs were generated in hospitality sector with a relatively low skilled labour and low wages dragging average hourly earnings lower. However, questions remain on the actual size of the labour market slack and will only become clearer when the economy re-opens and Government support programmes roll over.
Risk assets further benefited from the optimism last week (S&P up +4.75%, WTI up 12% to almost $40 and US HY yields rallied almost 1.5%). Even government bonds reacted in a risk-on way at last, with US Treasuries and German Bunds selling off by over 20bps.
US: The ISM Manufacturing survey for May came in-line slightly below the expectations at 43.1 (43.8 exp., 41.5 prev.). Labour data was much stronger than expected, as Nonfarm Payrolls increased by over 2 million and unemployment dropped to 13.3% (19% exp., 14.7% prev.).
Canada: Employment increased by 290k (-500k exp., -2mil prev.).
Eurozone: Unemployment in Germany increased more than expected by 238k (190k exp., 372k prev.). In Italy, May Manufacturing PMI was much better than expected at 45.4 (36.8 exp., 31.1 prev.), while Services PMI was slightly above expectations at 28.9 (26.1 prev., 10.8 prev.). In Spain, May Manufacturing PMI was in line with expectations at 38.3 (37.8 exp., 30.8 prev.) and Services PMI was at 27.9 (25 exp., 7.1 prev.).
CapEx increased 4.3% YoY vs. the expectations of a -5% drop in Q1. No other major data releases.
House prices registered -1.7% fall in May according to Nationwide. Revisions to PMIs were not significant as they continue to show that activity remains low as the government continues the lockdown policy.
Australia: RBA came out very optimistic after their monthly meeting, as the economy performed better than the had feared. Q1 GDP report came in at -0.3% QoQ (-0.4% exp., -0.5% prev.).
New Zealand: No major data releases.
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