How much of the soft patch?

The data released over the last couple of weeks clearly suggest that the US economy is facing hurdles. The figures released this (shortened in US and UK) week can be a “make or break” for the soft-patch theory.

We started mentioning a term “soft patch2” around a month ago and not long after comments suggesting that the recovery in US is slowing down became abundant. Yet some investors are yet to believe in the concept of another period of slower growth. Therefore this week might be decisive, as key data on activity and labor market is to be released and the market consensus for those numbers remains surprisingly optimistic.

Let’s start from activity. We first saw a significant drop in the Philly Fed in April (from 43,4 to 18,5 pts.). In May the index fell further (to 3,9 pts. – the combined decline in those two months was equal to 2,3 standard deviations from a 10y sample and brought the index below a 10y average) but this time it was joined by the NY Fed (from 21,7 to 11,88 pts.) and Richmond Fed (from 10 to -6 pts.). Meanwhile the consensus assumes just a moderate decline in ISM (from 61,2 in March to 58 pts. in May, just 0,5 of a 10y standard deviation) and actually a rebound in ISM services (from 52,8 to 54 pts.).

When it comes to the labor market the consensus sees a rise in employment of some 190k (more than 50k less than in April) with the ADP only few thousands lower. That seems to be strikingly inconsistent with weekly claims figures. The weekly data show that the average number of initial claims in late-April and early-May increased by some 40k from the previous period. Statistically that could subtract some 120k of new jobs from the payrolls numbers. The optimism is based partly on expected results of hiring campaign held by McDonald. The company reportedly added some 62k employees, however the impact on seasonally adjusted figure will be smaller. Moreover, floods in the Southern regions may have actually subtracted from the headline number.

The impact of the data on the markets has been moderate so far. Equities saw just a minor correction and oil prices remain elevated. If the soft-patch2 is about to worry markets, this week provides some opportunities.    

Technically the S&P500 futures are at the crossroads, facing an upper limit of a declining channel. However, with US investors back to trading only tomorrow in the afternoon, anything drawn until that point should be treated with caution.

EURUSD – new deal for Greece?

The Financial Times reported on Sunday that European politicians are working on a new deal for Greece that would provide it with the funds (Greece needs another tranche by mid-July) at the cost of more austerity and greater external intervention in its’ public finances.

The news helped the euro at the opening of the Asian trade today but not to an extend to move above a cluster of resistances (upper limit of the declining channel and a horizontal resistance of 1,4340). Subsequently the EURUSD turned lower and is moving towards a support at 1,4240. Next few hours may be conclusive for the pair not only for the short-term but also for the mid-term. 

Events to watch – data from Asia

The calendar for Monday doesn’t include key market drivers. There is a figure on Canadian monthly GDP (8.30 ET, 14.30 CET, consensus +0,2% m/m) but more important figures will come from Asia on Tuesday, including output and PMI in Japan, business confidence in New Zealand and building approvals in Australia. However, investors are focused on the long list of the key US data (from Tuesday to Friday) and any news regarding Greece and peripheries.   

Przemysław Kwiecień PhD, Chief Economist

Disclaimer, investment risk warning
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