Morning comment: Euro area CPI, UK PMIs & US payrolls

Chris Scicluna
Emily Nicol
Mantas Vanagas

Ahead of what is set to be a very busy Friday for economic data, yesterday saw US stocks and Treasuries both slip back (the S&P500 closed down 0.2% and 10Y yields rose 4bps to 2.54%) while the dollar firmed slightly. With Japan and China still on holiday and little in the way of economic news to influence the mood, Asian markets were mixed overnight (e.g. the Hang Seng is up 0.3%, the KOSPI is down 0.5% and the Aussie ASX was unchanged while ACGB yields rose despite some further weak building approvals data) but US stock futures are pointing higher. All eyes this afternoon will be on the latest US labour market report, which will be released alongside several other top-tier US data. Before then, flash euro area inflation data are set to post a big rise, albeit due principally to the timing of Easter. And the April services PMIs will illustrate the ongoing underlying Brexit-related weakness in the UK economy, which explains why the BoE yesterday signalled no need to tighten policy until greater clarity on the relationship with the EU is reached.

Euro area:
Focus in the euro area today will be firmly on the flash inflation report for April. Preliminary releases from the four largest member states earlier in the week broadly exceeded expectations, particularly in Germany where the headline EU-harmonised rate was up 0.7ppt to a five-month high of 2.1%Y/Y. Services prices – particularly those related to tourism – appear to have been the principal driver, and mainly due to the timing of Easter. So, we expect today’s figures to show a rise in euro area headline inflation of 0.3ppt to 1.7%Y/Y and a pickup of the same amount in core inflation to 1.1%Y/Y – both forecasts a touch above the Bloomberg consensus expectation – and see the risks to both figures skewed to the upside. However, we won’t get overexcited about today’s numbers – as the Easter effect wears off, we expect both headline and core inflation in the euro area to fall back in May.

While it again suggested that at least two rate hikes are likely to be required over the coming few years, the BoE yesterday suggested that there is no urgency to tighten policy, with the case for doing so seemingly weak at least until Brexit uncertainty is resolved in a favourable way (see yesterday’s Euro wrap-up for more details). Today’s UK data – the services and composite PMIs for April – are likely to illustrate the weakness of the case for tightening over the near term. The headline indicator for services dipped in March to 48.9, the first sub-50 reading since the Brexit referendum. And while a pick up is probably on the cards, the survey will almost certainly remain consistent with subdued momentum in the sector at the start of the second quarter. And with the manufacturing output PMI having declined by more than 2pts last month, the composite PMIs will probably imply little or no economic growth at the start of Q2.

Beyond the economic data, the results of yesterday’s local elections in parts of England and Northern Ireland will dominate the UK political agenda today. So far, with roughly half of the results reported, significant losses have been suffered by the Conservatives and Labour in leave- and remain-voting constituencies alike, as voters seemingly sought to punish both main parties for the Brexit shambles. As discussions continue over a possible Brexit deal centered on some form of close customs partnership with the EU, quite how the main party leaders will interpret and respond tactically to the results remains to be seen, with next week perhaps set to be pivotal in determining whether a compromise between May and Corbyn can at all be reached.

Of course, all eyes this afternoon will be on the US labour market report. While figures this week revealed an upside surprise in the ADP survey measure of private sector employment last month, the manufacturing ISM’s employment component fell sharply. On balance, we continue to expect another solid gain in non-farm payrolls in April (the Bloomberg consensus expectation this morning is 190k, very close to the March reading) to keep the unemployment rate unchanged at 3.8%. Average hourly earnings growth is expected to rebound to 0.3%M/M to push the annual rate back up to 3.3%Y/Y in line with the average of the past six months. In addition, in what is set to be a very busy day for US data, today will also bring the preliminary goods trade report for March, as well as April’s non-manufacturing ISM, with the latter expected to signal ongoing solid expansion at the start of the second quarter.

Following on from the weak house price figures released earlier this week, today’s building approvals data were similarly downbeat about the state of the housing market. Indeed, the number of dwelling approvals fell a whopping 15.5%M/M in March, the largest decline for fifteen months, although the retreat was led by a drop of more than 30%M/M drop in the volatile ‘other dwellings’ category while house approvals were down a little more than 3%M/M. Perhaps unsurprisingly, the weakness in March followed a significant surge in February – total approvals were up 19.1%M/M due to temporary strength in the ‘other dwellings’ category. Nevertheless, this still left total approvals down 27.3%Y/Y in March, the eighth consecutive double-digit decline, while approvals for houses were down more than 18%Y/Y, the largest annual drop for a decade. In value terms approvals for dwellings fell 23%Y/Y in March, while the value of approvals for non-residential buildings fell more than 8%Y/Y. As such, the value of total construction approvals fell 17.8%Y/Y.

In other news, contrasting with the mixed messages from the equivalent manufacturing PMI releases earlier in the week, today’s twin services PMI surveys pointed to a further modest improvement in the headline indices at the start of the second quarter. In particular, the CBA services PMI rose 0.8pt in April to 50.1, signalling broadly stable conditions in the sector having been in contractionary territory in the previous two months. And so, the CBA’s composite PMI rose 0.5pt on the month to 50.0, albeit only indicating a stagnating economy. Meanwhile, the more volatile and much longer-running AiG services PMI rose for the third consecutive month in April and by a stronger 1.8pts, albeit leaving the headline index at a still-weak 46.5.

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