This week will likely bring more financial market volatility as economic data releases will cause investors to reconsider their forecasts for future economic growth, inflation and Federal Reserve policy action.
Market participants will likely put more weight on the wage growth numbers in the jobs report released later this week. Strong employment growth coupled with easing growth in hourly earnings would pull yields lower and cause stocks to move higher. On the other hand, stronger than anticipated wage growth could push yields higher, reversing the dip that came following the Personal Consumption Expenditures (PCE) data release at the end of last week. The benchmark 10-year Treasury yield fell more than 5 basis points to 4.501% on Friday. The 2-year Treasury yield was also down by more than 5 basis points at 4.877%.
1. The Institute for Supply Management will release the manufacturing and services Purchasing Managers’ Index (PMI) – two of the most reliable leading economic indicators – that track economic activity in the manufacturing sector and the services sector. The ISM manufacturing index is expected to remain in contraction territory while the consensus among economists is that the ISM services index may have rebounded slightly in May.
After showing signs of recovery in March, the manufacturing PMI indicated economic activity in the manufacturing sector contracted in April. This was partially due to a decline in demand. Improvements in supply chains meant faster supply deliveries. Although higher supply coupled with lower demand exert downward pressure on prices, commodity prices continue to drive production costs higher. Economic activity in the services sector also contracted in April, ending 15 consecutive months of growth. The decline was due to higher labor costs and easing consumer demand.
2. Total construction spending is expected to have rebounded along with the increase in privately-owned housing starts in April. Total construction spending fell 0.2% in March driven by declines in private spending while public spending had continued to increase. The decline in residential construction accounted for the bulk of the decline in private construction spending in March.
3. The main event this week will be the Bureau of Labor Statistics Employment Situation. In April, healthcare and social assistance continued to lead employment gains followed by transportation and warehousing as well as retail and wholesale trade. The consensus among economists is that the labor market remained tight with the unemployment rate holding at a low 3.9% along with wage growth accelerating slightly to 0.3% from 0.2% in April. However, higher-for-longer interest rates and data showing consumer spending is slowing down could add pressure on businesses to get leaner, potentially resulting in further slowing of the labor market.
