It’s intriguing that with a global equity selloff suggesting imminent deflation, 5-yr-5-yr forward implied US inflation expectations have risen in recent weeks to just under 2.8% (versus 2% during last autumn’s panic), while amid the Spanish solvency panic, euro zone 2-yr swap spreads are still just over 80bps (versus almost 120bps pre LTROs). On a 3-mth moving average basis, implied US 5-10 year inflation expectations in May were 2.5%, and to avoid any technical distortions from negative TIPS yields, the Fed household survey measure is also near its highest point of recent years, so we remain a long way from the deflation scares that have characterised previous bouts of risk-off behaviour.
The major US data series released over the last week were weaker than expected (non-farm payrolls, unemployment, manufacturing, construction, factory orders and auto sales), but in line with my warning back in March of a likely loss of momentum, and the US economy remains quite a distance from a cliff edge. The May ISM Composite Index of industrial sector activity fell to 53.5 from an unrevised 54.8 in April. Most series fell including production, supplier deliveries and inventories. The employment component also fell to 56.9. However, the new orders component rose to its highest level since April 2011 driven by domestic demand, with the separate index of new export orders falling sharply to 53.5 on weakening BRIC demand. Exports are 14% of US GDP, and euro zone exports are only about $200bn a year, or the same as trade with Mexico. The price index fell sharply to 47.5, its lowest level in six months.
The unemployment rate increased to 8.2% in May from 8.1% in April. Essentially, the jobless rate has held nearly steady during the last two months. The positive news is that the labour force increased in May, after posting declines in March and April, lifting the participation rate to 63.8% from 63.6% in April. In addition, employment advanced 422,000 following declines of 31,000 and 169,000 in March and April, respectively. Hourly earnings rose only 0.1% in May to $23.41, which puts the y/y increase at 1.7%, the smallest increase since November 2010.
US personal income increased 0.2% (2.8% y/y) in April, down from 0.4% March; that included a 0.2% rise (3.2% y/y) in wages and salaries. Among other income categories, rental income surged 1.0% (14.2% y/y), a tenth consecutive monthly gain of 1% or more. Dividend income remained strong, rising 1% in April and 6.5% from a year ago, exacerbating overall inequality trends given the concentration of equity ownership in the top income decile. Personal consumption expenditures picked up to a 0.3% increase in April or 4% y/y. Durable goods purchases rose 0.6%, resuming growth after a 1.4% decrease in March led by motor vehicles. The PCE chain price index was flat in April after a 0.2% increase in March; it’s up 1.8% y/y.
In fact, adjusted for inflation, per-capita disposable incomes are currently at about the level first seen in late 2006, although as I’ve highlighted previously, the average hides a widening distribution as income inequality remains the key trend. The best hope near-term for a boost to US retail spending will come from sliding energy prices. Overall, we’re stuck in that on-going ‘washboard’ recovery for both markets and the global economy, in which the psychological scars of 2008 remain raw for investors, terrified of being wrong footed by the next systemic meltdown. The best way to play it is to be tactically flexible, and tilt portfolio risk weightings regularly based on what have proved to be the pretty reliable macro signals.