Introduction

General slowing around the edges and specific trouble re-emerging in Chinese manufacturing were the week's global negatives. But the week's data were far from uniformily soft with global demand for labor, at least for the most part, the greatest strength right now and no doubt behind what is a surprising lift underway in economic confidence, a lift that belies week after week of trade actions and counter actions. Whatever the degree of underlying strength, the Reserve Bank of Australia and Reserve Bank of India look to steal the headlines in the coming week with possible rate cuts though the latest assessment from the Bank of Canada is a reminder that, all red signals aside, there are still plenty of positives in the global economy.

The Economy

Monetary Policy

That the slowdown in late 2018 and early 2019 was temporary is the key message of the Bank of Canada's May meeting where, in line with expectations, the benchmark overnight rate was held unchanged at 1.75 percent. The BoC's economic assessment, which had been hawkish before turning dovish, is sounding hawkish again. The bank said Canada's oil sector is beginning to recover with production increasing and prices remaining above recent lows, and the housing market, despite regional weaknesses, is now more stable. Interestingly, the bank said strong job growth suggests that businesses see recent economic weakness as temporary. Even more upbeat, the bank said the latest data point to a pickup in consumer spending and business investment and, yes, a pick up in exports as well. Core inflation is close to the 2 percent target where the bank expects it to stay. The BoC, in a wait-and-see mode much like the US Federal Reserve, said it remains data dependent and is watching developments in household spending, oil markets not to mention global trade.

International trade

Slowing global trade is, in fact, a major risk right now for many economies including the US. Both imports and exports fell sharply in April with exports falling the most. The monthly goods deficit remains very deep for the US, at $72.1 billion in April with exports down 4.2 percent year-on-year and with imports down 2.7 percent. Apri'ls total compares unfavorably with a $71.3 billion monthly average in the first quarter and marks a weak GDP opening for second-quarter net exports. Capital goods are the US's greatest export strength and these fell sharply in the month and are down 3.7 percent year-on-year. The only export component showing an April gain was food & feeds which nevertheless is 6.2 percent below April last year. Global trade figures have been contracting and the latest US numbers are part of this picture, one that took a dramatic turn late in the week when the White House announced that the US will apply tariffs to Mexican goods beginning June 10 in a move aimed, not at balancing trade, but at pressuring Mexico to stop migrants from crossing the US border. In other actions, China said it will compile an "unreliable entities list" of companies that harm its interests. This follows the US blacklisting earlier this month of Chinese telecom equipment maker Huawei. Hong Kong also posted its April trade numbers in the week, which also showed declines for both imports and exports. Officials cited escalated trade tensions between the US and China as a factor weighing on external demand and noted the outlook for exporters would depend heavily on whether these tensions are resolved.

Manufacturing

Alerting everyone to global trade has been a run of mostly weak diffusion data on manufacturing, where directional pivots in activity are generally considered to lead pivots for the economy as a whole. China's CFLP manufacturing PMI fell to a lower-than-expected 49.4 in May to indicate slight contraction for the sector. Forecasters were expecting a dead even score of 50.0. Similarly, recent data on Chinese industrial production, fixed asset investment and retail sales all missed expectations too. The coming week opens on Monday with the Caixin manufacturing PMI which fell 6 tenths to stand at 50.2 in April going into May's report. The Caixan and CFLP don't always move together but, as evidenced in the accompanying graph, they have nevertheless been very close together for the most of the past year. Though size isn't everything, Caixan's sample universe is purchasers at 500 manufacturers and the CFLP's is 800. The initial outcome of US tariff hikes and whether they have any effects, limited effects, or substantial effects may well be signaled first by one or both of these PMIs.

GDP

Slowing in China and Europe are major concerns right now as perhaps is slowing in India. The nation's gross domestic product increased 5.8 percent on the year in the first quarter, slowing from 6.6 percent in the fourth quarter and falling short of the consensus for 6.3 percent. This is the third consecutive decline in year-on-year growth and the weakest growth seen since early 2014. The decline in headline growth was relatively broad-based with most sectors of the economy recording weaker growth in gross value added, including agriculture, manufacturing, utilities and public administration. This was offset by stronger growth in construction and mixed results in other parts of the services sector. The Reserve Bank of India's next policy review is scheduled for the coming week. At the last review, held in early April, officials lowered the main policy rate, the repurchase rate, from 6.25 percent to 6.00 percent. Officials retained their forecast for GDP to grow by 7.4 percent in the first half of the new fiscal year and judged risks to this forecast to be evenly balanced. The RBI was the first  bank to start cutting rates and if they continue to do, even past the general elections, they would raise expectations at least to a degree for greater and greater central-bank accommodation.

Employment

Arguably the strongest positive across the developed economies right now is strong demand for labor. Though employment is widely considered to be a lagging economic factor, the Bank of Canada's observation at last week's meeting is worth considering – that strong hiring in the face of economic slowing means employers see business improving. There were a run of employment reports in the week and most were strong including data from Switzerland where employment expanded a further 26,000 or 0.5 percent in the first quarter following the fourth quarter's gain of 15,000. This put the number of people in work at 5.092 million as tracked in the graph. The latest advance reflected a rebound for goods producing industries and a second successive increase for services. Looking ahead, there was also good news on vacancies which were up 9.4 percent from a year ago. Switzerland's labor market continues to hold up well despite less bullish signs among the other economic indicators.

Japan's unemployment rate fell from 2.5 percent in March to 2.4 percent in April, matching the consensus forecast and close to the multi-decade low of 2.2 percent recorded in May 2018. The unemployment rate has been at or below 2.5 percent since the start of 2018. Japan's participation rate increased to 62.1 percent in April, at its highest level since 2001 and up from 61.9 percent in March. Tightening labor conditions will likely reinforce the Bank of Japan's hope that employment gains will eventually translate into stronger wage growth and help push inflation towards its 2.0 percent target, though officials at last month's policy meeting again stressed that this will be a gradual process.

In contrast to Japan, the German labor market showed some cracks in May. Against expectations for further improvement, the number of people out of work jumped 60,000 in the month to 2.279 million. This was large enough to add 1 tenth to the jobless rate which, at 5.0 percent, remains nevertheless within touching distance of April's post-Reunification low. Definitional changes played a part in April's results but a clear negative was another decline in vacancies which fell 6,000 following a 4,000 April decline. The effects of sluggish economic activity may now perhaps be materializing in Germany's labor market. This is consistent with recent business surveys that have found deteriorating confidence and an increasingly more cautious view of the outlook.

Sentiment

Sentiment readings in Europe have been in a year long slump but some indications in May are suddenly positive. The EU Commission's yardstick of economic sentiment posted a much-needed bounce in May. At 105.1, the headline index was 1.2 points above April to reverse much that month's 1.7 point decline. Still, May's rise was the first increase of any size following a run of back-to-back declines that began in July 2018. The improvement reflected a more optimistic consumer sector as well as firmer morale in industry and services. However, construction and retail trade both recorded losses. Regionally, the national ESI gained ground in all four larger Eurozone states. France stood out, climbing 4 points to 100.8 for its highest level since last September. Gains elsewhere were more modest with both Germany and Spain failing to fully reverse their April losses while a recovery in Italy was boosted by a weak base.

Italy's own confidence gauge, also at a weak base, improved as well in May. At 100.2, the Istat's gauge was up 1.4 points versus April and at its highest level since last November. An upturn in aggregate sentiment was mirrored in all the sectors of the economy. Manufacturing saw its first gain since September 2018 and construction recorded a new multi-year high. However, retail reversed only a fraction of the previous month's dip and services were little changed. Households were also in a more optimistic mood although morale here, at 111.8, remained a full 2 points short of its level at the start of the year. Despite all the troubles surrounding global trade or European objections to Italian budget plans, these results point to an uptick for coming economic activity in Italy, both business and consumer.

Consumer spirits in the US are also improving, this despite all the headlines over tariffs and bad days for the stock market. At 134.1, consumer confidence beat expectations in the best showing since November. Forecasters will note a sharp drop in those who describe jobs as "hard to get", to 10.9 percent from April's 13.3 percent which points to strength for the coming week's US employment report. More also say jobs are plentiful and more expect jobs to increasingly open up over the next six months. Confidence in the end ultimately moves in line with job prospects and thus the outlook for the consumer remains very positive, perhaps a dormant positive given what has been an uneven run for consumer spending. The consumer sentiment index also posted a gain in May, up 2.8 points to 100.0 but showing more strength in the beginning of the month than in the end of the month. Tariffs may not be hurting US confidence but it may well be driving up inflation expectations. In a reading that is certain to catch the notice of Federal Reserve policy makers especially the hawks, inflation expectations rose a very sharp 3 tenths in May to 2.8 and 2.6 percent for the year-ahead and 5-year outlooks.

Inflation

Going into what may become a period of tariff-fed inflation effects, global prices were clearly subdued. Consumer prices in France rose a provisional and slightly smaller than expected 0.2 percent in May. This put the annual inflation rate at 1.0 percent, down 0.3 percentage points versus April and its lowest reading since August 2017. The deceleration in the yearly CPI rate reflected a 0.3 percentage point fall in inflation in services to just 0.7 percent and a 0.1 percentage point decrease in the manufacturing rate to minus 0.6 percent. Energy and food similarly subtracted. The May figures reinforce the view that underlying inflation trends remain soft and warn that economic growth will need to gain additional momentum if the European Central Bank's near-2 percent target is to come within reach. Consumer prices in Italy were also just marginally higher in May. A 0.1 percent monthly rise saw the annual inflation rate slide from April's final 1.1 percent to 0.9 percent to equal the lowest result since April last year.

Inflation in the US had also been moving in the wrong direction but tilted back up in April. The PCE price index excluding food and energy, which is the Fed's policy gauge, hit expectations with a 0.2 percent monthly gain and with the year-on-year rate, as tracked in the blue line of the graph, also hitting expectations at 1.6 percent for a 1 tenth gain. The overall PCE price index, tracked by the green line, rose a monthly 0.3 percent with this yearly rate at 1.5 percent and, like the core, also up 1 tenth. For policy makers, especially Jerome Powell who forecast movement higher for the core, these results will cool any immediate heat for a rate cut. The red columns in the graph are average hourly earnings, the next posting of which will be in the coming week with the US employment report. Expectations are pointing to upward pressure, though only incremental pressure.

Markets: Tax cut hangover as US profits slip

The reason for the ongoing stock market sell off is easy to see, right? Tariff actions and tariff talk have led to very specific and clearly identifiable declines in the stock markets. Yet perhaps acting invisibly in the background of the sell off, at least for the US, is a slowing in corporate profit growth. Profits remain at historically strong levels but the best may be behind. The first look at first-quarter US corporate profits were available in the second estimate of first-quarter GDP and the word 'slump', or at least the words 'initial slump', come to mind. At an annual level of $2.003 trillion, after-tax profits in the quarter were 3.5 percent behind their fourth-quarter pace. Taxes on corporate income had been a big factor in the 2018 profit rise, falling by 37 percent to a $212.0 billion annual pace in the first quarter of last year when President Trump's cuts were first put in place. But taxes have since been climbing higher, to a $242.1 billion pace in this year's first quarter. True, this is still $150 billion below where they were in 2016 but it is still substantially higher than recent quarters. Constraints in global trade are only one negative holding down the outlook for corporate profits, the other is stagnating stimulus from the prior tax cut and no prospect of additional stimulus from any new tax cut.

The bottom line

The anecdotal data unfolding right now are offering a mixed picture: trouble for manufacturers but no trouble for overall confidence. Inflation may or may not be slowing but in any case is clearly subdued. Central banks were focused early in the year on possible risks tied to global trade and also to Brexit. Both of these factors are reemerging in force and help explain what may be an increasing bias for looser monetary policy. Central bank meetings in Australia and India in the week to come may offer signals of what to increasingly expect.

**Jeremy Hawkins and Brian Jackson contributed to this article

Week of June 3 to June 7

Manufacturing will be a highlight in a week that will end with the US employment report and include several central bank announcements. The first by the Reserve Bank of Australia will be early on Tuesday and is too close to call with a rate cut a real possibility in what would extend this year's dovish tilt for global monetary policy. On Thursday the Reserve Bank of India may well cut rates again though for the European Central Bank, which will also make an announcement on Thursday, no action is the call. Yet the ECB's reaction to Brexit risk and the US-China trade war may yet put a dovish tilt on this meeting as well. Heavyweight market-moving data begin Monday with ISM manufacturing out the US and with forecasters looking for steady conditions after unexpected slowing in April. A risk for the ISM report is slowing export demand as it is for German manufacturing orders and German industrial production which will be posted on Thursday and Friday. The highlight on Friday will be the US employment report where expectations are pointing to general strength in May following robust strength in April, results that would underscore the fundamental strength of labor demand.

China: Caixin Manufacturing PMI (Sun 21:45 EDT; Mon 01:45 GMT; Mon 09:45 CST)

Consensus Forecast: 50.0

After the unexpected 7 tenths fall in the CFLP manufacturing survey last week, forecaster also see a decline for the Caixin PMI. This index slipped 6 tenths in April to 50.2 and a 2 tenths decline to 50.0 is the expectation for May.

German Manufacturing PMI for May (Mon 03:55 EDT; Mon 07:55 GMT; Mon 09:55 CEST)

Consensus Forecast: 44.3

The manufacturing PMI for Germany has been sending some of the most prominent signals of global weakness. The final index in May is expected to hold at the mid-month reading of 44.3.

US: ISM Manufacturing Index for May (Mon 10:00 EDT; Mon 14:00 GMT)

Consensus Forecast: 52.9

Consensus Range: 51.5 to 54.0

At a consensus 52.9, steady but moderate strength is the call for the ISM manufacturing index in May which in April came in well below expectations at a nearly 2-year low of 52.8.

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

Consensus Forecast: Toss Up

A rate cut or no rate cut: forecasters are split. The Reserve Bank of Australia has been warning of downside risks to the global outlook and officials are on the record saying an approaching rate cut is possible. The policy rate is currently at 1.50 percent.

Eurozone HICP Flash for May (Tue 05:00 EDT; Tue 09:00 GMT; Tue 11:00 CEST)

Consensus Forecast, Year-over-Year: 1.4%

Eurozone Underlying HICP Flash

Consensus Forecast, Year-over-Year: 0.9%

Eurozone inflation is expected to slow in May, to a consensus of 1.4 percent vs 1.7 percent in April with the underlying reading at 0.9 percent vs April's 1.2 percent.

Eurozone Unemployment Rate for April (Tue 05:00 EDT; Tue 09:00 GMT; Tue 11:00 CEST)

Consensus Forecast: 7.7%

April's unemployment rate in the Eurozone is expected to hold steady at March's 7.7 percent which was 1 tenth better than expectations. Data in the last report showed across-the-board strength.

Eurozone Retail Sales for April (Wed 05:00 EDT; Wed 09:00 GMT; Wed 11:00 CEST)

Consensus Forecast, Month-to-Month: -0.5%

At no change in March, Eurozone retail sales were soft yet still better than expectations with forecasters calling in April for a 0.5 percent drop.

German Manufacturers' Orders for April (Thu 02:00 EDT; Tue 06:00 GMT; Tue 08:00 CEST)

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

Consensus Forecast, Year-over-Year: -5.6%

German manufacturer's orders managed to move back in the plus column in March, at least for the month-to-month rate which came in at 0.6 percent. But the year-on-year rate remained well into the negative column at minus 6.1 percent. For April, forecasters see a monthly decrease of 0.1 percent for a yearly minus 5.6 percent.

European Central Bank Announcement (Thu 07:45 EDT; Thu 11:45 GMT; Thu 13:45 CEST)

Consensus Forecast: No change

The European Central Bank is expected to keeps its refi rate unchanged at zero. New uncertainties over Brexit and US-China trade are likely to be cited as increasing risks.

German Industrial Production for April (Fri 02:00 EDT; Fri 06:00 GMT; Fri 08:00 CEST)

Consensus Forecast, Month-to-Month: -0.5%

Production was surprisingly firm in March, up 0.5 percent on the month, but forecasters see a decrease of 0.5 percent for April. The March report saw the first back-to-back increase in output since July/August 2017 and the highest level of production since September last year.

US Nonfarm Payrolls for May

Consensus Forecast: 180,000

Consensus Range: 142,000 to 215,000

Unemployment Rate

Consensus Forecast: 3.7%

Consensus Range: 3.5% to 3.7%

Private Payrolls 

Consensus Forecast: 175,000

Consensus Range: 140,000 to 180,000

Manufacturing Payrolls 

Consensus Forecast: 6,000

Consensus Range: -5,000 to 13,000

Participation Rate

Consensus Forecast: 62.8%

Consensus Range: 62.7% to 62.9%

Average Hourly Earnings

Consensus Forecast, Month-to-Month Change: 0.3%

Consensus Range: 0.2% to 0.4%

Average Hourly Earnings

Consensus Forecast, Year-on-Year Change: 3.2%

Consensus Range: 3.1% to 3.4%

Average Workweek

Consensus Forecast: 34.5 hours

Consensus Range: 34.4 to 34.5 hours

Moderating strength is expected for nonfarm payrolls in May, at a consensus 180,000 vs April's unexpectedly strong 263,000 increase. The unemployment rate is seen edging higher to 3.7 percent with average hourly earnings warming back up from April's 0.2 percent to an increase of 0.3 percent. The year-on-year rate for earnings is expected to hold steady at 3.2 percent. Private payrolls are seen rising 175,000 with manufacturing payrolls expected to increase 6,000. The workweek is seen rising incrementally to 34.5 hours with the labor participation rate steady at 62.8 percent.