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No inflationary pressure on wages despite lower unemployment rate

06 June 2017

Last week we had US activity data. Firstly, personal income has risen by +0.4% on the month, which is higher from Q1.

Manufacturing ISM, Chicago PMI and ADP were decent as well in the middle of the week but on the opposite, US non-farm payroll was a major miss today, with average weekly earnings still soft at +2.5% year over year. This week we have American figures, with non-manufacturing ISM and durable goods orders.

Labor market data pushed the dollar and bond yields lower, which hurts us. However, we keep our positions, bearing in mind a few things :

  • Investor positioning is clean on those assets. The market is no longer net short duration. Investors are no longer long on the dollar, but they are heavily long EUR (highest since 2013) and short on Canadian dollar (lowest point ever)
  • US activity data confirms so far a pickup in US Q2 GDP, and Q1 data has been revised upwards
  • Fed market pricing is still on the low side with a mere 3 hikes anticipated until end of 2019. With an economy at full employment, GDP stable around 2% and inflation close to target (even if latest short term data was softer), we think this is too low.

In a nutshell, these themes show a positive asymmetry in our favor (investor positioning, technical indicators, sentiment).

In Europe, PMI came out well oriented again. Portuguese GDP was above expectations and Italian GDP was revised upwards. On the political side, Italian risk is getting higher with a possibility to have snap elections as soon as this year. Chinese data was in line with consensus and rather comforting.

Market volatility remains low, on equities, fixed income or exchange market. ECB next Thursday could bring some more volatility with a potential change in tone, even if inflation data we had this week (below expectations, 0.9% on core CPI) should temper ECB board. On the very same day, June 8, we will have British elections with polls getting much tighter. We went into this topic and it looks like turnout is going to be key: if strong, the outcome will be a close call, if low then Theresa May should secure a large victory.

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