Welcome to the last trading day of May 2016, my where did that month go, as we race towards the Fed meeting and their rate decision on June 15th. However before that we have a very important week ahead of us with the ECB and OPEC meetings on Thursday and of course US Non-farm payrolls on Friday.
The ECB is expected to retain its current stance following the March move to raise its quantitative easing by a third to EUR80bn a month with negative deposit rates, and whilst Germany and France have shown a stronger-than-expected Q1, others in the 19 nation region are still in need of urgent financial attention. Indeed German unemployment this morning dropped to 6.1%, a new low since the current stats began after reunification in 1992, although retail sales continue to slip, coming in negative for the second consecutive month in May; this had little if any impact on expectations. Market concerns are still focussed on the major economies of Spain and Italy where the banking situation, particularly in Italy, is flashing severe warning signals.
OPEC are to meet in Vienna and top of the list is of course production quotas, but what the members may notice as they head to the Austrian capital is the high number of Sport Utility Vehicles (SUVs) on the roads of Europe. According to industry consultants, SUVs accounted for over a quarter of all sales in the largest countries of Europe and this is reflected across the world from China to the US. The report states that drivers the world over are buying bigger vehicles while sales of fuel efficient hybrids struggle to make ground. In the US, the world’s largest oil consumer, data from the Transportation Research Institute at the University of Michigan shows, that in April the average fuel economy of cars sold fell to 25.2 miles per gallon (mpg) down from a peak of 25.8 mpg in August 2014 just before the fall in oil prices. At current trends the Institute thinks this year will see the first drop in US fuel economy averages since 2007 and there have been year-on-year improvements since that time. Good news for OPEC as this increase in demand is spurred on by the relatively low price of fuel and of course should help underpin demand for the next few years.
US Non-farm payrolls continues to be the most eagerly awaited economic release and this month is no different with calls for a further rise of 160k and a stable unemployment rate of 5%. We did write a daily back in March highlighting that the Fed have all the ammunition they need to raise rates and that is still the case; although the market still prices in just a 30% chance of a June hike and 54% for July. The inflation and employment outlooks remain constant and now that financial conditions and indeed global conditions have calmed we are somewhat surprised the market is not more focussed on a rise. With a Presidential election in November the window for the Fed is closing the closer we get to the election.
A tightening of a further 25bps would be positive for the future outlook of our portfolios as the rise in inflationary levels in the US economy needs attention from a Fed that remains “ahead of the curve”. As always the chances of a hike priced by the market will swing violently on a non-farm number either side of the expected 160k, with one eye on the average hourly earnings series for further wage pressures which are running at 2.5% per annum.