Key events in developed markets next week

We think markets are getting a bit ahead of themselves when pricing in a recession in the US over the next couple of years. The dataflow has remained solid so far, and that should be the general trend over the coming week. That said, we don’t think Friday’s key jobs report will cause a massive rethink among investors. Jobs growth could slip back after a bumper reading in April, although if it does, we think it will be more a function of constrained supply, rather than weaker demand. The National Federation for Independent Businesses has consistently reported that almost 40% of firms have positions they are not able to fill due to a lack of workers. Importantly for the Fed, this does appear to be translating into higher wages. Admittedly, the headline earnings numbers have been less exciting of late, but there is survey-based evidence that firms are looking towards non-wage benefits (sign-on bonuses, more vacation etc) to keep staff on-board.

In short, we don’t expect the Fed to follow through with the rate cuts that markets are now pricing in, although a lot depends on trade. Trade tensions are growing, and markets will be watching next week to see if a) Trump is inching closer to placing tariffs on the remaining basket of Chinese goods and b) if China is gearing up for further, non-tariff retaliation.

After a few months of Easter distortions, the true picture of eurozone inflation will come into view next week. On the back of a higher April reading, a drop in both core and headline inflation is expected, but the question is how far down will both actually go? As uncertainty continues, businesses tend to take increased costs into their margins, delaying the recovery of core inflation that the higher wage growth would warrant. Focusing on Germany, we have the next batch of industrial data due next week. This should provide some interesting insights into whether the bottoming out of industry continued or was simply a one-off.

Moreover, the European Central Bank will very likely present details of its Targeted Longer-Term Refinancing Operations (TLTRO) pricing. But more importantly, keep a close eye on the latest macro projections, as these should provide some idea of whether the ECB would eventually be willing to cut rates again or not.

UK Prime Minister Theresa May will officially stand down next week, kick-starting a leadership contest that is widely expected to result in a more eurosceptic candidate taking over. As ‘no deal’ fears return over the summer, the economy will continue to suffer. PMIs next week are likely to hint at subdued activity, partly as firms continue to make costly preparations for a ‘no deal’ exit instead of investing in new projects. While consumer activity has the potential to continue performing a little more strongly as we head into the summer, we think the effect of Brexit uncertainty will keep a lid on overall growth and we don’t currently expect a Bank of England rate hike this year.

May should provide us with additional reassurance that the labour market continues to show resilience amid global trade chaos, though we wouldn’t be surprised if fundamentals started dropping off their recent highs in the coming months. The recent soft patch of growth has arguably knocked the economy off its ‘running with limited spare capacity’ trajectory, which was a common theme throughout 2018. The emergence of this economic slack, coupled with the recent US-China trade flare up, could easily see firms postpone any hiring decisions until better data starts to materialise and uncertainty wanes.

During all of this, immigration should continue to put upward pressure on the labour force participation rate. In the short-term, in light of the above reasoning, we may see the unemployment rate edge higher – though this should only be temporary; as we head into late-2019/early-2020, we expect economic growth should start to regain some momentum and we should start to hear some more positive trade rhetoric. In the meantime, we will be scrutinising employment growth in goods-producing industries to see if we can spot an early sign of recovery in sectors that have been struggling more recently – particularly energy and construction.