Introduction

This year's run lower appears to have bottomed and the global economy may now be moving back to the strength of late last year, that is before the Federal Reserve issued their last rate hike in December. Improvement is evident in the latest employment data out of the US and the solid employment and improving GDP data out of Europe. Inflation news is less clear though there are still indications, especially evident in Europe, which do justify Jerome Powell's hunch that the core is about to turn higher.

The Economy

Unemployment

The latest data out of Europe show increasing demand for labor. Joblessness across the region continued to fall in March, down a sizeable 174,000  following February's 58,000 drop. This has reduced the number of people out of work to 12.630 million. The fall was steep enough to shave another tick off the unemployment rate which, at 7.7 percent, is now the lowest since September 2008. More than half of the overall slide was due to a surprisingly hefty 96,000 decline in Italy where the rate shed 0.3 percentage points to 10.2 percent. Spain, down 36,000, accounted for much of the rest with this rate 0.2 percentage points lower at 14.0 percent. Falls in France and Germany were too small to have any impact on their jobless rates which held steady at 8.8 percent and 3.2 percent respectively. There was also good news on youth unemployment which decreased 24,000 to 2.325 million, reducing this rate from 16.2 percent to 16.0 percent. Eurozone employment continues to hold up well, and better than generally expected.

Similarly superlative is the labor market in the US where nonfarm payroll growth easily beat expectations at 263,000 in April while the unemployment rate fell an outsized 2 tenths decline to an unexpected 3.6 percent. This is the lowest rate in 49 years and now matches unemployment claims which are also at 49 year lows. Tightening conditions are the signal from the pool of available workers which continues to be drained, down nearly 500,000 in the month to 10.9 million. The pool is a mix of those actively looking for work, down 387,000 to 5.824 million, and those who want a job but aren't actually looking, down 106,000 to 5.121 million. The lower the pool gets and the higher the number of job openings go (at last count 7.087 million), the more likely that inflation, if it doesn't go higher, won't at least be going much lower. Other effects may well be greater US reliance on foreign labor, increasing rates of offshoring, and also increasing interest in business investment as employers seek out machines to make up for the lack of people.

US wages didn't show any immediate jolt from April's employment strength. Average hourly earnings came in as expected for the monthly rate, at 0.2 percent, and 1 tenth under expectations for the year-on-year rate at 3.2 percent. The yearly rate peaked in February at 3.4 percent but has since moderated. Whether it will continue to moderate is in question given the strength of demand. And whether the PCE core rate, another central measurement for policy makers, will continue to move lower is also in doubt. At least it is for Fed Chair Jerome Powell who, at his press conference following Wednesday's FOMC meeting, attributed the core's dip to "transitory" factors including lower portfolio management fees (tied to last year's drop in the financial markets) as well as downturns in apparel and airfare prices, all of which he sees as likely temporary. The comparison he draws is 2017's decline for the core that had everyone looking at wireless service prices where a price war had erupted. Powell expects core inflation, which fell to a 1.6 percent rate in March, to return to the 2 percent target where it ran through much of last year. Powell also pointed to novel measures of the core rate, including the trimmed mean which excludes outliers, as running at or near the 2 percent rate.

After dipping in March, Eurozone inflation rebounded in April. At a higher than expected annual 1.7 percent rate, the flash reading was up 0.3 percentage points versus March. Core rates also moved higher in April: the narrowest gauge, which excludes energy, food, alcohol and tobacco, saw its yearly rate climb from March's 0.8 percent to 1.2 percent; when omitting energy and unprocessed food, inflation gained 0.3 percentage points to 1.3 percent. Pressure was evident in services which jumped 8 tenths to a year-on-year 1.9 percent. The European Central Bank is no doubt relieved with April's rebound though inflation rates are still well short of the bank's 2 percent target.

Improvement in April inflation is especially evident in Germany where consumer prices were surprisingly strong. A provisional 1.0 percent monthly jump was sharp enough to lift the year-on-year inflation rate from March's 1.3 percent to 2.0 percent, at target and the highest mark since last November. The rebound easily more than reversed the previous period's decline and was one of the sharpest increases in recent times. The acceleration reflected price rises in both the goods and, particularly, the service sectors. For the former, inflation climbed 0.2 percentage points to 1.8 percent while services posted a 0.9 percentage point jump to 2.1 percent. Food (0.8 percent after 0.7 percent) was little changed and energy (4.6 percent after 4.2 percent) just slightly firmer which together suggest that Germany underlying inflation was also markedly higher.

GDP

The two big GDP reports of the past couple of weeks have shown surprising strength, the 6.4 percent year-on-year showing for China and last week's 3.2 percent annualized growth rate for the US. But growth in Europe isn't nearly as strong yet on net, at least for the first quarter, the results are favorable. The first look at the Eurozone economy showed real GDP expanding 0.4 percent from the previous period. This was up from 0.2 percent posted at the end of last year, a little stronger than expected and the best performance since the second quarter of 2018. Yet it was only enough to leave annual growth at 1.2 percent. German GDP wasn't released as part of the flash though the French economy rose 0.3 percent and Spain a solid 0.7 percent.

And Italy moved out of recession last quarter as total output rose a stronger than expected 0.2 percent versus the third quarter. Though subdued, this was the economy's best performance since fourth quarter 2017. Following an unrevised 0.1 percent quarterly contraction at the end of 2018, the gain put annual growth at 0.1 percent, just marginally higher than last time but at least back in positive territory. The only other details released by Istat showed a positive quarterly contribution from goods producing industries, services and agriculture. However, domestic demand was weak and it looks like the increase in total output may have been due to an improvement in net exports.

Manufacturing

The week started on a soft note as manufacturing PMIs released Tuesday morning in China proved disappointingly flat. The CFLP manufacturing index fell to 50.1 in April, down from 50.5 in March and below the consensus for 50.5, while the Caixin index fell from 50.8 in March to 50.2 in April, also suggesting activity in the sector remains subdued. For the Caixin survey, output and new orders grew at a more modest pace in April while new export orders fell for the second time in the last three months. Both of these reports have shown very narrow rates of change over the past three years, mostly slow rates of growth. Though industrial production did jump in March, these reports for April are not pointing to much inflationary threat coming out of China. The Caixin survey samples more than 500 companies each month while the CFLP (China Federation of Logistics and Purchasing) samples about 800 companies.

Consumer Spending

Another less than stellar signal comes from US unit vehicle sales which fell sharply in April. Jerome Powell directly cited March auto sales as an economic plus in Wednesday's FOMC press conference, but April sales that were later released couldn't keep up the pace. Unit vehicle sales managed only a 16.4 million annual rate in April which was far below March's 17.5 million rate and well below Econoday's consensus range. The setback returns the sales pace to the disappointing mid-16 million range of January and February that represented a ratcheting down from the fourth-quarter pace in the mid-17 million range. These results point to trouble for the motor vehicle component of the April retail sales report and though unit sales data are a clouded mix of business and consumer sales, they hint strongly at an inauspicious second-quarter opening for US consumer spending.

Housing Prices

Home prices are a key source of household wealth and erosion here isn't consistent with improvement for inflation. Case-Shiller data out the US fell sharply in February with the year-on-year rate for the 20-city index down a steep 5 tenths to year-on-year growth of only 3.0 percent which is the lowest since early in the recovery in August 2012. Yet this report may very well and very soon begin to turn higher as housing sales, fed by a steep drop in mortgage rates, have been on a sharp rise this year. Home price data in the UK were also released showing unexpected strength in April as the Nationwide house price index rose 0.4 percent on the month that boosted the yearly inflation rate to 0.9 percent, up from 0.7 percent in March and a 5-month high. The quarterly change in prices, the best guide to underlying developments, was only 0.1 percent higher but this at least was its first positive showing since September-November last year. 

Markets: Demand for Treasuries will give support to housing

It would be too early for Jerome Powell to have cited a future upturn in home prices as another reason core inflation is likely to turn higher. But that is a possibility given the downdraft in mortgage rates which has a direct bearing on home sales. US mortgage rates are tied to the 10-year Treasury note demand for which, despite all the acceleration for global stock markets, has proven surprisingly firm this year. As long as it stays firm mortgage rates may very well extend their ongoing drop which in April came to 13 basis points to an average 4.14 percent for conventional 30-year fixed-rate mortgages. The 10-year Treasury edged 3 basis points higher in the latest week to 2.53 percent which is still well down from a high of 2.79 percent in late January, just before the Fed stepped back from its rate hike bias. The resilience in demand for Treasuries is likely tied to demand for safety, betraying perhaps a bit of investor disbelief amid another run higher for stocks.

The bottom line

The week's economic news on net was upbeat led by the April employment report in the US and including first-quarter GDP out of Europe. Inflation readings are still mixed but there are indications, such as those from the European and German CPIs, which do justify the Fed's suspicion that inflation may very well be moving higher in what for the global stock markets, if it means hawkish central bank talk, might not be promising news. And the hawkish sounding Fed meeting was surprising in that it followed two prior very dovish meetings: the one in January when they abandoned their plans for rate hikes and the one in March when they announced the end of quantitative tightening. But what is consistent is that is was a memorable meeting which moved the markets, just like back in December when they defiantly raised rates one last time in a move that coincided with the year-end collapse for global stocks. Whether the Fed wants to move the markets is an uncertain goal, but at least their next meeting isn't until the middle of June.

**Jeremy Hawkins and Brian Jackson contributed to this article

Week of May 6 to May 10

Inflation will be the focus for US data but it will be late in the week, first producer prices on Thursday then a consumer price report on Friday that is not expected to show much acceleration. Job openings in the JOLTS report will be posted on Tuesday and will update how over-heated the US labor market is or isn't. For Canada, housing starts will be posted on Wednesday, the trade balance on Thursday, and the labour force survey on Friday where a gain is expected.

For Europe, Eurozone retail sales for March will open the week on Monday followed by German manufacturers' orders and French merchandise trade both on Tuesday and both for March. French industrial production will be posted on Friday as will German industrial production and German merchandise trade where a dip is the call. Also posted Friday will be first-quarter GDP out of the UK where tangible acceleration is the expectation.

A wild card for the week's Asian calendar is Chinese merchandise trade data where no date has been set. Otherwise Australian trade and retail sales data will be posted early in the week followed at midweek by a policy announcement from the Reserve Bank of Australia amid expectations for no action. The Reserve Bank of New Zealand will also be issuing a statement at midweek. Chinese CPI data are also expected at midweek with noticeable pressure expected. Japanese household spending and Indian industrial production will be posted later in the week.

EZ: Retail Sales for March (Mon 05:00 EDT; Mon 09:00 GMT; Mon 11:00 CEST)

Consensus Forecast, Month-to-Month: -0.1%

Retail sales rose for the fourth time in five months in February, up a solid 0.4 percent and showed broad strength. But forecasters are looking for a slight dip for March, at minus 0.1 percent for Eurozone retail sales.

AU: Merchandise Trade for March (Mon 21:30 EDT; Tue 00:30 GMT; Tue 11:30 AET)

Consensus Forecast: A+4.250 billon

A March surplus of A$4.250 billion is expected for Australian merchandise trade vs a surplus of A$4.801 billion in February.

AU: Retail Sales for March (Mon 21:30 EDT; Tue 00:30 GMT; Tue 11:30 AET)

Consensus Forecast, Month-to-Month:  0.4%

Retail sales in Australia are expected to rise 0.4 percent in March following a strong 0.8 percent rise in February.

Reserve Bank of Australia Announcement (Tue 00:30 EDT, Tue 04:30 GMT; Wed 14:30 AET)

Consensus Forecast Change: 0 bp

No change is the call for the Reserve Bank of Australia which is expected to hold its main policy rate at 1.50 percent where it has been since August 2016. In their last announcement in April, policy makers warned that downside risks to the global economic outlook had increased.

DE: Manufacturers' Orders for March (Tue 02:00 EDT; Tue 06:00 GMT; Tue 08:00 CEST)

Consensus Forecast, Month-to-Month: 1.0%

German manufacturer's orders have fallen for three reports in a row including a 4.2 percent monthly drop in February which has raised talk that the factory sector may be facing recession. But forecasters see a bounce for March orders, up a consensus 1.0 percent.

FR: Merchandise Trade for March (Tue 02:45 EDT; Tue 06:45 GMT; Tue 08:45 CEST)

Consensus Forecast: E-4.70 billion

A deficit of E4.70 headline is expected in March vs a E4.00 billion deficit in February which was the second lowest level since July last year. Exports were up a monthly 0.9 percent in February with imports up 0.4 percent.

US: JOLTS: Job Openings for March (Tue 10:00 EDT: Tue 14:00 GMT)                           

Consensus Forecast: 7.215 million

Consensus Range: 7.000 to 7.230 million

Gains in nonfarm payrolls point to strength for job openings in the JOLTS report, at a consensus 7.215 million vs what was a much lower-than-expected 7.087 million in February.

Reserve Bank of New Zealand Announcement (Tue 20:00 EDT; Wed 02:00 GMT: Wed 14:00 NZT)

Consensus Forecast Change: No consensus available

The Reserve Bank of New Zealand left rates unchanged at their last meeting in March but changed their bias from neutral to a rate cut. The overnight case rate, at 1.75 percent, was last cut in late 2016.

DE: Industrial Production for March (Wed 02:00 EDT; Wed 06:00 GMT; Wed 08:00 CEST)

Consensus Forecast: -0.5%

Boosted by construction that masked a 0.2 percent dip in manufacturing, German industrial production rose a higher-than-expected 0.7 percent in February. But give back is the consensus for March at decrease of 0.5 percent.

CA: Housing Starts for February  (Wed 08:15 EDT, Wed 12:15 GMT)

Consensus Forecast: 196,000

Housing starts in Canada are expected to come in at a annual rate of 196,000 vs 192,527 in February. The headline trend for this report has been flat.

CN: CPI for March (Wed 21:30 EDT; Thu 01:30 GMT; Thu 09:30 CEST)

Consensus Forecast, Year-over-Year: 2.5%

After rising a yearly 2.3 percent in March, the consensus for Chinese consumer prices in April is a yearly rate of 2.5 percent. Data for February were clouded by new year effects raising the importance of March's report.

US: International Trade Balance for March (Thu 08:30 EDT; Thu 12:30 GMT)

Consensus Forecast: -$50.1 billion

Consensus Range: -$54.2 to -$48.8 billion

A steady deficit of $50.1 billion is expected for March international trade following sharply better-than-expected totals in both February and January. Advance data for the goods portion of March's report showed strength in exports and a much narrower-than-expected deficit of $71.4 billion.

CA: Merchandise Trade for March (Thu 08:30 EDT, Thu 12:30 GMT)

Consensus Forecast: C$-2.40 billion

A C$2.40 billion deficit is expected for Canadian merchandise trade in March vs a C$2.9 billion deficit in February that showed monthly declines for both imports and exports.

US: Initial Jobless Claims for May 4 week (Thu 08:30, Thu 12:30 GMT)

Consensus Forecast: 220,000

Consensus Range: 215,000 to 222,000

Initial jobless claims have ratcheted higher to the 230,000 level the last two reports following two prior reports under 200,000. For the May 4 week, a move back to 220,000 is Econoday's consensus.

US: PPI-FD for April (Thu 08:30 EDT; Thu 12:30 GMT)

Consensus Forecast, Month-to-Month Change: 0.2%

Consensus Range: 0.1% to 0.5%

US: PPI-FD

Consensus Forecast, Year-on-Year Change: 2.4%

Consensus Range: 2.3% to 2.4%

PPI-FD Less Food & Energy

Consensus Forecast, Month-to-Month Change: 0.2%

Consensus Range: 0.1% to 0.3%

PPI-FD Less Food & Energy

Consensus Forecast, Year-on-Year Change: 2.5%

Consensus Range: 2.4% to 2.5%

PPI-FD Less Food, Energy, & Trade Services

Consensus Forecast, Month-to-Month Change: 0.2%

Consensus Range: 0.2% to 0.2%

Producer prices were one of the few inflation reports that showed visible pressure in March, rising a sharp 0.6 percent and reflecting increases not only prices of energy products but also finished goods. But giveback is expected for headline PPI-FD in April, to a consensus increase of only 0.2 percent. Less food & energy in April is also seen rising 0.2 percent with the consensus for less food, energy and trade services likewise at 0.2 percent.

JP: Household Spending for March (Thu 19:30 EDT; Thu 23:30 GMT; Fri 08:30)

Consensus Forecast, Year-over-Year: 1.6%

Japanese household spending is expected to rise 1.6 percent year-over-year in March vs what was a lower-than-expected 1.7 percent in February which was pulled down by weakness in spending on housing.

DE: Merchandise Trade for March (Fri 02:00 EDT; Fri 06:00 GMT; Fri 08:00 CEST)

Consensus Forecast: E18.1 billion

German merchandise trade surplus slightly exceeded expectations in February at E18.7 billion though exports fell sharply, down 1.3 percent on the month and exceeded by a 1.6 percent fall in imports.

FR: Industrial Production for March (Fri 02:45 EDT; Fri 06:45 GMT; Fri 08:45 CEST)

Consensus Forecast, Month-to-Month: -0.6%

Industrial production in March is expected to fall 0.6 percent month-to-month vs a February rise of 0.4 percent that was much better than expected. February's strength was centered in manufacturing which rose 1.1 percent.

IT: Industrial Production for March (Fri 04:00 EDT; Fri 08:00 GMT; Fri 10:00 CEST)

Consensus Forecast, Month-to-Month: -0.9%

After an unexpected jump of 0.8 percent in February, Italian industrial production in March is expected to fall a month-to-month 0.9 percent. Both consumer goods as well as capital goods showed strength in February.

GB: GDP for First Quarter (Fri 04:30 EDT; Fri 08:30 GMT; Fri 09:30 BST)

Consensus Forecast, Quarter-to-Quarter: 0.5%

Consensus Forecast, Year-over-Year: 1.8%

Fourth-quarter GDP expanded at a 0.2 percent quarterly basis and a 1.4 percent yearly basis with the business, consumer and government sectors all contributing to growth. An uptick is expected. The consensus for first-quarter GDP is a 0.5 percent quarterly increase and a yearly increase of 1.8 percent.

IN: Industrial Production for March (Fri 08:00 EDT; Fri 12:00 GMT; Fri 17:30 IST)

Consensus Forecast, Year-on-Year: 2.0%

Held back by weakness in manufacturing, industrial production in India was 0.1 percent higher year-on-year in February with forecasters calling for a 2.0 percent yearly increase in March.

US: Consumer Price Index for April (Fri 08:30 EDT; Fri 12:30 GMT)

Consensus Forecast, Month-to-Month Change: 0.4%

Consensus Range: 0.3% to 0.5%

Consumer Price Index

Consensus Forecast, Year-on-Year Change: 2.1%

Consensus Range: 2.1% to 2.1%

CPI Core, Less Food & Energy

Consensus Forecast, Month-to-Month Change: 0.2%

Consensus Range: 0.2% to 0.2%

CPI Core, Less Food & Energy

Consensus Forecast, Year-on-Year Change: 2.1%

Consensus Range: 2.1% to 2.2%

March saw a higher-than-expected 0.4 percent gain for the overall CPI and a lower-than-expected increase of only 0.1 percent for the core. A similar mix is the call for April. The overall CPI is expected to hold at a 0.4 percent gain with the less food & energy core at a modest 0.2 percent gain. The year-on-year core is seen at 2.1 percent as is the overall CPI, both results showing increases.

CA: Labour Force Survey for April (08:30 EDT, 12:30 GMT)

Consensus Forecast: 15,000

A 7,200 fall in Canadian employment was on was the low end of the consensus range in March reflecting a sharp drop for services. The April consensus is an increase of 15,000. The unemployment is expected to remain unchanged at 5.8 percent.

US Treasury Budget for April  (Fri 14:00 EDT; Fri 18:00 GMT)

Consensus Forecast: $150.0 billion

Consensus Range: $120.0 billion to $225.0 billion

Six months into fiscal year 2019, the government's year-to-date deficit in March was $691.2 billion and 15.3 percent deeper than the prior year. The Treasury budget for April, which is a tax month, is expected to show a surplus of $150.0 billion vs a surplus of $214.3 billion in April last year.