1. After the US economy appears to have contracted (-0.5%/-0.8%) in the first quarter, how is the economy doing here in Q2 which is half over this week?
Last week we learned that after a simply dismal March labor report, April job growth bounced back above 200k. The May employment survey will be done in the week ahead. Weekly initial jobless claims have fallen to new cyclical lows, as has the unemployment rate.
The gradual improvement is widespread. The under-employment slipped to 10.8% from 10.9%. It peaked above 17% but remains elevated. Those who have involuntarily taking part-time work fell by 125k to 6.58 mln, which is also a positive trend that needs to continue. The same can be said of the long-term (27 weeks+) unemployed. Those fell 38k to 2.53 mln.
The employment report was good but not spectacular. The March JOLTS report should confirm the continued absorption of labor market slack, as job openings rise (February highest since 2001) and quits increase (10% year-over-year).
The most important US report in the week ahead, however, is about the consumer, not the worker. The consumption component in Q4 14 rose 4.4%, the fastest increase since 2006. In Q1 15, the pace slowed to 1.9%. If the US economy is strengthening in Q2, it is important to see it in the consumption data. We anticipate consumption to accelerate toward 2.5%. After falling for three months through February, retail sales rose in March by the most in a year. The retail sales likely eked out a small gain in April. We already know that auto sales fell month-over-month. Excluding autos, the retail sales may have increased by 0.5%.
The components used for GDP calculations also fell for three months before rising 0.4% in March. The consensus calls for a 0.5% in April. If true, the March and April period offset in full the decline in December-February.
Manufacturing output fell over the same period and posted a modest 0.1% increase in March. The consensus expects a 0.2% increase in April. Overall, industrial output likely stabilized after falling 0.6% in March (mostly on utility output and energy sector).
2. Is the meltdown in German bunds over?
There has been what appears to be a flash crash of sorts in the German bund market that has had knock-on effects throughout debt markets, equities and currencies. The 10-year bund yield slipped below five bp on April 17, and the 30-year yield eased below 44 bp. At their peaks last week, the 10-year yield reached almost 78 bp and the 30-year pushed above 1.40%.
Deflationary pressures have eased recently and may account for some of the backing up of yields. Market positioning was also extreme as many were anticipating a fall into negative territory due to a shortage of bunds for investment and collateral purposes.
However, the magnitude of the move, and ripple effects through the capital markets, suggests something more may be taking place. Increasingly market participants are discussing the decline in liquidity not volume. In this context, liquidity is about the size of a transaction that moves the market. Precisely what is taking place is not clear. It does seem to reflect changes in the micro-structure of markets, the role of officials directly, through asset purchases, and indirectly through regulation. The US Treasuries, Japanese government bonds and now German bunds have all experienced similar situations. More work needs to be done in this space.
