We’ve been analytically dogpiling the #GlobalDivergences theme for 5-months now along with the attendant implications for the $USD, domestic-centric exposures and EM/Eurozone/China assets more broadly.
Most recently, and as quick contextual pretext to this morning’s macro data, here’s what we said earlier in the week after receiving the full compendium of Fed Regional Survey data which, almost universally, signaled resurgent strength in industrial activity and sequential strength in the May ISM data - developments which served to further underscore the evolving Growth and Policy Divergence dynamic we’ve been detailing:
…. a rebound in May ISM’s and a strong 2Q headline GDP print may amplify the U.S. vs OUS Growth Divergence at the same time that Draghi may be forced to rhetorically or tangibly walk back the Taper timeline which would have the effect of amplifying and/or recharging the Policy Divergence vector. Both of which would be $USD supportive. (you can read that full note here >> #Divergences | Of Tourists & Trophy Trades)
As it relates to this morning’s NFP and ISM data, a couple top-down notables:
- NFP → Consumption Growth: Accelerating Aggregate Hours growth (accelerating payroll growth + static ave. weekly hours) continues to augur strength in real output in 2Q and the combination of aggregate hours growth and accelerating wage growth are implying a moderate acceleration in aggregate income growth in May. In other words, the baseline expectation for consumption growth remains positive nearer term, particularly with easier PCE base effects supporting RoC strength into 3Q. And to the extent the labor market continues to tighten and some measure of late-cycle wage inflation does, in fact, percolate further, consumer confidence and real household consumption capacity stand to benefit.
- ISM → No May-laise! The rebound was ubiquitous across the survey indicators in May with the Headline advancing +1.4pts alongside a +4.3pt ramp in Current Activity and a +2.5pt increase in New Orders. The rise in New Orders and Backlogs suggest Current Activity will remain solid nearer-term and continues to imply that labor scarcity in the manufacturing sector is growing more acute. Prices Paid made a fresh 87-month high and while Input Costs continue to rise at a growing premium to Prices Received – input costs growing faster than output prices doesn’t carry positive margin implications – broader inflation pressure will remain supportive of the previously described Monetary Policy Divergence dynamic into 3Q, at least.
Summarily, what we’re seeing in the early May data is just a more discrete manifestation of the Global Divergences that have been emerging since the beginning of the year and that are likely to persist as a broader swath of Eurozone and EM economies traverse the wrong side of the growth curve through 2H18.
Have a great weekend.
