Due to lack of apocalyptic headlines in the overnight session, and some speculation that Spain will get a one year reprieve in hitting its fiscal pact targets, risk has seen a modest rebound, even if the economic data across Europe was sideways at best, and Goldman even released a note titled "Increasing signs that the improvement in the German labor market is coming to an end." Yet the market, desperate for good news, took reports of German retail sales and French consumer spending, which came slightly above expectations, as an indication that somehow, somewhere Europe may be getting better and ran with it. Of course, with the EUR oversold to record levels, not much is needed for a brief covering spree. That said, with lots of economic news on the docket, including the Irish Fiscal Pact referendum, expect much headline kneejerk reactions during the trading day, which will likely make for a very volatile session.
Summary of key overnight developments via BBG:
- ECB’s Draghi said policy makers will keep focusing their crisis support on solvent euro area banks as he reiterated it’s not the central bank’s job to fix the cause of the region’s turmoil
- European inflation slowed more than economists forecast this month, cooling to the least in more than a year as the economic slump showed signs of deepening
- IG spreads reached YTD wide of +231, according to S&P; Market IG at 122bps vs YTD high of 123.35bps; Markit HY at 670bps; YTD high 708bps
- With new Greek elections scheduled for June 17, Syriza leader Tsipras tells voters he does not believe that staying in the euro requires the massive cuts in government spending to which Greece’s leaders have agreed
- China is well equipped to withstand a possible Greek exit from the eurozone, Xinhua reported, citing Zhang Yansheng, secretary-general of the Academic Committee of the National Development and Reform Commission
- Irish citizens vote today on the EU’s Fiscal Stability Treaty with polls indicating they will endorse measures designed to ease the region’s debt crisis
This is what Goldman said in its pessimistic note on German employment:
Increasing signs that the improvement in the labor market is coming to an end
[13]Bottom line: After a continuous decline in unemployment until the beginning of the year, the number of unemployed is now moving sideways. That said, employment continues to rise, although the number of vacancies is also declining, which suggests that the improvement in the labour market is coming now to a halt.
The number of unemployed (seasonally and calendar adjusted) remained unchanged in May, after an increase of 18k in April. Some of the stagnation, according to the Labour Office, reflects fewer public employment measures. The number of employed increased by 29k in April (latest data available) after +27k in March, and the unemployment rate - national definition - eased to 6.7% in May after 6.8% in April (in the definition of the ILO the unemployment rate stood at 5.2% in May).
This is a mixed report and we think the signs of stagnating labour market are becoming clearer. While it is true that employment is still rising, the speed at which jobs are created has slowed significantly, to less than 30k over the last two months from more than 50k in the previous six months. Moreover, the number of vacancies - while still high in absolute terms - continues to fall.
To be sure, given how tight the labour market is in some regions (unemployment rates in Southern Germany are below 4%), it should not be too surprising that unemployment cannot continue to fall at the pace seen previously. But an increasing reluctance of companies to hire, as reflected in business surveys and declining vacancies, seems increasingly to be playing a role too.
Key events, via BBG and GS:
- 7:30: Challenger Job Cuts (Y/y), May, (prior 11.2%)
- 8:00: Cleveland Fed President Sandra Pianalto speaks on monetary policy.
- 8:15: ADP employment report (May): Downside risks? Consensus forecasts expect a modest acceleration in the ADP measure of private employment growth for May. There is downside risk to the consensus forecast for ADP. Average growth rates between the ADP measure and the official BLS count of private employment have been roughly equal over the last three and six months. Consensus: +150k; Last +119k.
- 8:30: GDP (Q1-Second): Downward revision on inventories. Per GS the Commerce Department will likely revise down its advance (first) estimate of Q1 GDP growth to +2.0% (quarter-over-quarter, annualized) from +2.2% previously, based on additional input data released over the last month. The entire downward revision reflects lower growth in inventories: real inventory accumulation will now be reported at around +$50bn from +$70bn in the advance estimate. Growth in final sales--GDP less inventories--is forecast to be revised up to +2.0% from +1.6%. The upward revision to final sales reflects faster growth in consumer spending and fixed investment, partly offset by weaker government expenditures. GDP: GS: +2.0%; Consensus: +1.9%; Last (Q1-Advance) +2.2%.
- 8:30: Jobless claims (Week of May 26): Steady? Initial jobless claims have held about unchanged at 370k for four consecutive weeks, and the consensus expects another flat reading in today's report. Given signs of slowing growth in the early survey-based data for May, there is some risk of a mover higher in claims. Consensus: 370,000; Last: 370,000.
- 9:45: Chicago purchasing managers’ index (May). Payback after large drop. The Chicago purchasing managers’ index declined sharply in April. The correction brought the index closer in line with other survey measures of US manufacturing activity, and we therefore think most of the decline will hold. However, given the steep drop, a small payback this month seems possible.
GS: 57.0; Consensus: 56.8; Last: 56.2. - 9:45am: Bloomberg Consumer Comfort, week of May 27, (prior -42)
- 10:00am: NAPM-Milwaukee, May, est. 53.4 (prior 52.9)
- ICSC Chain Store Sales (Y/y), May (prior 0.6%) Fed Fed
- 8:00am: Fed’s Pianalto speaks on monetary policy in Cleveland

