Last week was a good one for the global economy and risk assets. May economic data confirmed that we are seeing the pace of growth stabilize in China, and accelerate in the U.S. Plus, the ECB basically met very high expectations with regard to stimulating the EU economy and combating dis-inflation. From a stock market (and risk asset) standpoint, the macro-economic backdrop became more of a tailwind for stocks last week.
Starting with the ECB, by now you know the details of what they did, but more importantly, Mario Draghi and the ECB not only took steps to stimulate growth and inflation in the EU, but also left open the idea of doing more in the future (specifically ABS purchases and again hinted at potential outright QE).
Importantly, this came amid a mixed (at best) week of data for the EU, as manufacturing and composite PMIs missed, and May HICP declined further. Importantly, though, the ECB appears committed to doing what’s necessary to support the EU recovery. That, over time, will remove the risk of “Japan style” deflation in Europe (assuming they follow through).
In the U.S., economic data were almost universally better than expected. May ISM manufacturing PMIs were in-line at 55.4 vs. (E) 55.5 (remember this was the release last Monday with the three revisions), while ISM non-manufacturing PMIs were 56.3, and the monthly employment report beat estimates at 217K vs. (E) 213K. Finally, the four-week moving average for jobless claims fell to its lowest level since June ‘07 at 310K.
So, the data were good, but not too good that they altered anyone’s expectation of Fed policy—so for now tapering of $10 billion per meeting will continue, with rate increases coming next year.
Finally, Chinese data provided more evidence that the pace of growth is stabilizing between 7.0% and 7.5% annual GDP growth, which is what the market expected. And, while the housing market and “shadow banking system” are potential risks to monitor, for now the risk of a Chinese “hard landing” continues to recede.
Not that I’m a macroeconomic cheerleader, but last week was a good week, and certainly the improving macro outlook is helping stocks slowly rally, as last week:
1) Helped reduce the chances of European deflation, which is a big concern of markets (Tepper’s comments), and
2) Showed the economy in the U.S. and China are meeting current expectations (which is positive for risk assets).
After a busy week last week, things slow materially this week (which is normally the case).
Domestically it’s going to be quiet, with retail sales and jobless claims being the only notable releases. It’s pretty much consensus that the economy rebounded strongly in March from the winter weather and then paused in April, so especially in consumer spending, markets will be looking for a resumption of gains.
Internationally, China will be in focus with CPI and PPI coming tonight (although these numbers aren’t as important right now because inflation isn’t an issue in China). May industrial production and retail sales (out Thursday) will be watched to make sure they confirm the strength we saw in the May PMIs. These are probably the biggest releases this week.
Finally in Europe, data are also pretty sparse this week, as the UK Labour Market Report (which could send the pound sharply higher if it’s strong) is released Wednesday and the EMU industrial production comes Thursday. Given the moves by the ECB last week to stimulate growth, EU economic data (unless horrid) won’t matter as much as they did previously, until we start to see the effects of the stimulus.