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Week in Review: US Employment Report Disappoints

For the week ended 6 May 2016

  • US adds weaker-than-expected 160,000 nonfarm jobs in April
  • Canadian wildfires crimp crude production
  • Puerto Rico defaults on muni bond payments
  • Labour's Khan elected London mayor
  • Global growth remains anemic

Global equities fell this week amid lingering signs of sluggish global economic growth. The Chicago Board Options Exchange Volatility Index (VIX) fell on the week to 15.6 from 16.26, while the yield on the 10-year US Treasury note declined to 1.76% from 1.85%. West Texas Intermediate crude prices dropped to $44.35 from $46.22 a week ago, and global Brent crude prices fell to $45.03 from $48.11.

GLOBAL ECONOMIC NEWS

Downbeat employment report should keep Fed on hold
Whatever slight chance there was of the US Federal Reserve raising rates in June went by the boards after the US Department of Labor released an underwhelming employment report on Friday. Nonfarm payrolls rose 160,000, falling short of the 200,000 consensus. Downward revisions to the prior two months' data trimmed a further 19,000 jobs. The unemployment rate held steady at 5.0% while the participation rate dipped to 62.8% from 63.0%. The one bright spot in the report was a 2.4% rise in average hourly earnings on an annual rate. Futures markets are now pricing in a 4% chance of a Fed rate hike next month.

Alberta wildfires disrupt crude production
Crude oil production near Fort McMurray, Alberta, Canada, has been severely disrupted and nearly 90,000 inhabitants have been evacuated as a result of massive wildfires in the region. Crude prices drifted higher earlier in the week on the shutdown, but weak economic data knocked prices back on Friday. It is unclear how long production will be shut in or how big an impact this will have on the Canadian economy.

Puerto Rico defaults on bond payments
Puerto Rico's Government Development Bank defaulted on $422 million in municipal bonds this week, setting the stage for a larger default on 1 July, when nearly $2 billion in general obligation bonds come due. Puerto Rico carries a total debt load of $70 billion, an amount the governor has said cannot be repaid. The US Congress is considering legislation that might allow Puerto Rico to declare bankruptcy, an option that is unavailable under existing law.

Labour bounces back, elects London mayor
The United Kingdom's Labour Party retook the mayor's office in London after eight years in the hands of Conservative Boris Johnson. Sadiq Khan will be London's new mayor when Johnson's term expires.

PMIs suggest global growth remains slow
J.P. Morgan's composite global manufacturing purchasing managers' index, which aggregates PMI data from around the world, registered 50.1 in April, just above the breakeven line of 50. US manufacturing expanded less vigorously in April, as did manufacturing activity in China, the United Kingdom and Japan. Sluggish growth should keep central banks in lower-for-longer mode for a considerable period to come.

Reserve Bank of Australia latest central bank to cut rates
The Australian central bank unexpectedly cut policy rates this week to 1.75% from 2.0%. The policy rate now stands at the lowest on record. Later in the week, the RBA announced that it stands ready to cut rates further, citing broad-based weakness in domestic cost pressures. The Australian dollar fell sharply in the wake of the announcement.

European Commission cuts growth and inflation forecasts
The EC reduced its 2016 GDP forecast to 1.6% from 1.7% and cut its inflation outlook to just 0.2%, well below the 0.5% February forecast. Also this week, the European Central Bank's monthly bulletin indicated that economic risks remain tilted to the downside.

Draghi takes aim at Germany
ECB president Mario Draghi, who has been targeted by German politicians, particularly finance minister Wolfgang Schaeuble, attempted to even the score this week. Draghi said Germany is partially responsible for the global savings glut owing to the current account surplus Germany has run, in excess of 5% for more than a decade. Draghi said very low interest rates are not the problem; they are a symptom of an underlying problem. The problem, as he sees it, is that there is insufficient investment demand across the world to absorb the available savings in the global economy.

Turkish PM resigns as president consolidates power
Turkish prime minister Ahmet Davutoglu resigned this week after losing a power struggle with President Tayyip Erdogan. Erdogan is expected to install a more pliable prime minister. Davutoglu was considered market friendly and was close to European leaders, particularly German chancellor Angela Merkel. Davutoglo's departure comes at a critical juncture, as Turkey and the European Union try to iron out an agreement for Turkey to house tens of thousands of Middle Eastern refugees. 

GLOBAL CORPORATE NEWS

Halliburton ends quest to buy Baker Hughes
Unable to overcome the objections of regulators, Halliburton ended its attempt to merge with Baker Hughes. Regulators worried the deal would decrease competition in the oil services sector.

Oil companies mothball projects
Responding to slumping crude oil prices, oil exploration and production companies are shelving major projects worth billions of dollars. According to the Wall Street Journal, $270 billion in projects have been put on hold since crude prices began to fall two years ago.

THE WEEK AHEAD

  • China reports trade data and foreign exchange reserves on Monday, 9 May
  • Eurogroup finance ministers meet on Monday, 9 May
  • China releases consumer and producer price data on Tuesday, 10 May
  • US retail sales figures are reported on Friday, 13 May
  • China reports retail sales figures on Saturday, 14 May

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Sources: MFS research; The Wall Street Journal; The Wall Street Journal Online; Bloomberg News; Financial Times; Forbes.com; CNNMoney.com; NBCNews.com.

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