http://www.reuters.com/article/2012/06/01/eurozone-spain-germany-idUSL5E8H18PH20120601
( German back peddling helping spanish equities especially banks outperform their european peers today. Giving Spain another year to pretend it will cut their deficit doesn't address the black hole known as the Spanish banking system. )
http://globaleconomicanalysis.blogspot.com/2012/06/hyperbolic-selloff-coming-imf-discusses.html
Prime minister Mariano Rajoy has no idea what to do.
Without hispabonos (central bank guarantees of regional debt) the regional governments are going to have an exceptionally difficult time financing new debt or rolling over existing debt. Yet with guarantees, Spain faces more debt downgrades and higher yields overall.
When you don't know what to do, the default choice is to table the discussion and pray for a miracle.
IMF Discusses Contingency Plans
The Wall Street Journal reports IMF Begins Talk On Spain Contingency Plans
Indeed, central banks are by their very existence the epitome of moral hazard.
http://www.dailymail.co.uk/news/article-2153106/Has-cash-strapped-Spain-asked-IMF-huge-300BILLION-bailout-IMF-denies-rumours-contingency-plans.html
* * *
and....
http://www.zerohedge.com/news/overnight-sentiment-bath-salty
Submitted by Tyler Durden on 06/01/2012 07:10 -0400
( German back peddling helping spanish equities especially banks outperform their european peers today. Giving Spain another year to pretend it will cut their deficit doesn't address the black hole known as the Spanish banking system. )
(Reuters) - The German government shifted ground on Friday, supporting a European Commission proposal to give Spain more time to reduce its budget deficit, in a sign Berlin is prepared to take a more flexible approach to tackling the euro debt crisis.
The European Commission called this week for Spain to be given an extra year to make the cuts demanded of it, because it is forecast to be in recession this year and next.
Until now, Berlin has been cool to any measures that dilute austerity drives.
"Spain presented a stability programme in which it stated its clear intention to reach the 3 percent threshold in 2013," German finance ministry spokesman Johannes Blankenheim told a news conference when asked about the Commission proposal.
"We support Spain in its efforts to implement the necessary measures. But we also recognise that because of negative economic developments it will be difficult for Spain to reach its goals."
Asked if this meant that he supported giving Spain more time, he replied: "I think that's what I've been saying."
"Spain is meeting its obligations in the deficit procedure, so we see no reason to escalate this procedure," Blankenheim added. "The Spanish government is moving decisively to implement the required reforms and the German government is convinced that this decisiveness will be reflected in the markets."
Madrid had aimed to cut its budget deficit to three percent of GDP next year.
But having realised its 2011 shortfall was far higher than anticipated, it would have to lop around six percentage points off the deficit in two years to get there, a level of cuts economists say would choke an economy already in recession.
Spanish borrowing costs have soared on fears about the country's banking sector, which is beset by bad loans, and its heavily indebted regions. Many experts now expect it to need a Greek-style bailout although the government insists it will not.
GROWTH STRATEGY
EU leaders have been searching for a growth strategy to run in parallel with efforts to cut debt.
New French President Francois Hollande, Italian Prime Minister Mario Monti and others have called for a refocus on efforts to get the European economy moving.
The measures discussed until now - 'project bonds' backed by the EU budget to finance infrastructure spending, doubling the paid-in capital of the European Investment Bank and redirecting EU structural funds to areas which might reap short-term growth rewards - will help a little but will not make a significant difference, economists say.
Giving Spain 50 percent more time to complete its debt-cutting could be more of a help.
The European Union's executive has also pressed for a form of European "banking union" with cross-border deposit guarantees and a bank resolution fund.
That would help ward off the threat of a bank run by depositors fearing their country could leave the currency bloc and redenominate their euros into a vastly devalued national currency.
Berlin continues to reject those proposals.
Blankenheim said his government did not see how these ideas would help solve the debt crisis in the short term.
http://globaleconomicanalysis.blogspot.com/2012/06/hyperbolic-selloff-coming-imf-discusses.html
Friday, June 01, 2012 1:28 AM
Hyperbolic Selloff Coming? IMF Discusses Spanish Contingency Plans; Madrid Denies Plans; Hispabonos Dropped From Cabinet Discussion
The latest word of the day is the already approved, then denied, then tabled plan to implement hispabonos was dropped from discussion Friday's cabinet meeting according to La Vangauardia.
The approval of so-called hispabonos, which will allow the autonomous communities in the markets financed through the state with a lower cost, will be delayed at least a week after the Government has decided not to take it to the Council Ministers tomorrow.
According to government sources, this issue will not be among the topics to be discussed Friday by the Council, although it had considered that possibility.Mish Translation
The Prime Minister, Mariano Rajoy, guaranteed to last Friday CiU spokesman in Congress, Josep Antoni Duran Lleida, the instrument chosen to help the regions would be launched "soon", while government sources explained being worked on the model chosen.
Prime minister Mariano Rajoy has no idea what to do.
Without hispabonos (central bank guarantees of regional debt) the regional governments are going to have an exceptionally difficult time financing new debt or rolling over existing debt. Yet with guarantees, Spain faces more debt downgrades and higher yields overall.
When you don't know what to do, the default choice is to table the discussion and pray for a miracle.
IMF Discusses Contingency Plans
The Wall Street Journal reports IMF Begins Talk On Spain Contingency Plans
The European department of the International Monetary Fund has started discussing contingency plans for a rescue loan to Spain in the event that the country fails to find the funds needed to bailout its third-largest bank by assets, Bankia SA, BKIA.MC +0.19% people involved in the handling of the Spanish crisis said Thursday.
Both the EU and IMF want to avoid having to bailout Spain at all costs, the people said, but initial planning is under way given that the country is struggling to raise a EUR10 billion shortfall in funds to bail out Bankia. The stakes are extremely high because a three-year rescue loan for Spain could be as much as EUR300 billion, one person said, although any bailout could involve smaller, shorter-term loans.
"A better picture will emerge after the IMF review of the Spanish economy starting June 4," one of the people said. "But thoughts are already being discussed (within the European department)".
"Some say a Spanish bailout is inconceivable, but it's equally inconceivable that preparations are not being made for such an eventuality," the person added.
Spain's Economy Minster Says IMF Rescue Plan is Nonsense
Economy minister Luis de Guindos calls the rescue plan "nonsense" stating IMF report sees 70% of Spanish banks as healthy
Economy minister Luis de Guindos calls the rescue plan "nonsense" stating IMF report sees 70% of Spanish banks as healthy
Economy minister, Luis de Guindos, has described as "nonsense" that the IMF is preparing a plan if Spain fails to rescue Bankia funding. Moreover, says the institution will publish a report saying that 70% of Spanish banks is healthy.
The economy minister has also advanced to the June 11 will be released a first report of the International Monetary Fund concluded that 70% of Spanish banks is "perfectly" healthy and the remaining 30%, which is Bankia, would have "more difficult" to overcome the stress test posed by this organism.
However, De Guindos has stated that the IMF's stress test provides a hypothetical decline in GDP of 4% this year and 2% for next year, prospects "unreal," said.
"The report goes on to say that 70% of Spanish banks can overcome the situation without capital," he underlined Guindos, in an attempt to instill confidence in the situation of Spanish banks.
Anyone who thinks Spain's banks other than Bankia are "perfectly healthy" is a liar or insane.
Hyperbolic Selloff Coming?
The Telegraph reports Spain faces 'total emergency' as fear grips markets
LSE professor Paul De Grauwe is a complete fool trapped in academic wonderland.
If the market thinks the yield of Spanish and Italian debt should be greater than a 300 basis point spread to German bunds, then the ECB would soon be the proud owner of 100% of Spanish and Italian debt.
It is rather amazing that a professor cannot figure out that simple truism.
Economic fools like De Grauwe are part of the problem. They brainwash students into believing total and complete nonsense.
As for "doing the job of a central bank and stop worrying about moral hazard" I can say the same thing about Guy Mandy.Neither cares one iota that the German constitution does not allow what they propose. Neither bothered to figure out this mess has gotten bigger every step of the way because central banks ignored moral hazard.
Hyperbolic Selloff Coming?
The Telegraph reports Spain faces 'total emergency' as fear grips markets
Markets are on tenterhooks as Spanish yields test levels that forced the European Central Bank to respond last November with its €1 trillion liquidity blitz. “Nobody is short Spanish debt right now because they are expecting ECB intervention,” said Andrew Roberts, credit chief at RBS. “If it doesn’t come -- if we take out 6.8pc -- we’re going to see a hyberbolic sell-off,” he said.
Brussels floated the idea on Wednesday for a eurozone “bank union” and use of the European Stability Mechanism -- which has not yet been ratified by most states -- to rescue banks and sever the dangerous nexus between crippled lenders and crippled states.
The proposals were shot down instantly by Berlin. Such plans amount to debt-mutualization, a form of back-door eurobonds. German opposition is “well known”, said the Kanzleramt.
LSE Professor Paul De Grauwe accused the ECB of cherry-picking treaty clauses to justify inaction and failing to carry out its crucial mandate of financial stability. “They should buy Spanish and Italian bonds to cap yields at 300 basis points over Bunds, and let the lawyers argue about it for the next ten years,” he said.
Eurozone data released on Wednesday show that private credit and all key measures of the money supply contracted in April, suggesting that ECB’s €1 trillion liquidity blitz over the winter has failed to gain traction.Academic Wonderland and a Lesson on Moral Hazzard
Guy Mandy, credit strategist at Nomura, said the ECB has lost sight of the big picture and risks losing the euro altogether if if fails to restore basic confidence. “They need to weigh up events on a grander scale, stop worrying about moral hazard, and do the job of a central bank,” he said.
LSE professor Paul De Grauwe is a complete fool trapped in academic wonderland.
If the market thinks the yield of Spanish and Italian debt should be greater than a 300 basis point spread to German bunds, then the ECB would soon be the proud owner of 100% of Spanish and Italian debt.
It is rather amazing that a professor cannot figure out that simple truism.
Economic fools like De Grauwe are part of the problem. They brainwash students into believing total and complete nonsense.
As for "doing the job of a central bank and stop worrying about moral hazard" I can say the same thing about Guy Mandy.Neither cares one iota that the German constitution does not allow what they propose. Neither bothered to figure out this mess has gotten bigger every step of the way because central banks ignored moral hazard.
Indeed, central banks are by their very existence the epitome of moral hazard.
and......
http://hat4uk.wordpress.com/2012/06/01/crash-2-why-draghis-strong-words-on-the-euro-presage-the-first-big-banking-collapses/
CRASH 2: Why Draghi’s strong words on the euro presage the first big banking collapses.
The over-beveraged banker staggers in, Stage Right
“Her-huh…I guess Wall Street wen’ out an’ got drunk” (GW Bush, 2009)
When Mario Draghi directly says, in front of a phalanx of media and snappers, that without concerted action now the euro is dead, then you know he’s trying to do two things: first, stir the poetry nutters in Brussels into some form of action that isn’t entirely dsyfunctional; and second, use that to slow down the melting process in order to keep attention away from the real deal: the banking collapse, and the entry of $700 trillion of derivates into the real world. It promises to be quite some birth.
In the last three months alone, Draghi has poured €3 trillion into eurozone banks in an effort to keep the day of reckoning at bay. He must have known this was an entire waste of taxpapers’ money from the start, and so as always I’m left wondering whether the guy is just an incurable optimist, or a sociopath more than happy to accept a world in which the only things left are bankers and their head offices. But whatever his motives, we are only one major bank collapse away from the sort of inflexible timetable that started the First World War.
The Bank of Italy Governor Ignazio Visco later chose to put into words what Mario had said, by claiming that the ECB boss would act swiftly to calm the markets – ie, by buying bonds and euros. Draghi very probably is up for that, given his first priority (see above) is without question the banking system..and the bigget threat to it today is the derviatives-to-bond market collapse scenario.
In order (as always) to ensure that the taxpayer picks up the tab and not the shareholders or creditors, for some time now, Spanish, Italian and Portuguese banks have been loading up with sovereign bonds issued by their own governments, a move that neatly moves most of the risk of any default to European taxpayers, because – naturally – those bonds are guaranteed by the Governments issuing them – ie, us.
Of course, sovereign debt and banking derivatives are inseparable, in that one must inevitably lead to the other if your system is (a) globalised and (b) leveraged beyond any realistic use of the word such that one needs a new word for leveraged – like beveraged for example. (In Liverpool, bevvied means off yer face, legless, rat-arsed). It’s a far more apt word: the chaps who designed this system must’ve been pissed out of their minds at the time…..or marching through Bolivia, or both.
But what we have here, in summary, is everyone facing incalculable debt because, over the long term, banks tried to inflate the reality of their net worth by beveraging worthless toilet tissue, Governments bailed them out the first time in 2008, and then when the Governments found the Treasuries empty, the bankers bought all their worthless bonds for the taxpayer to guarantee, not them. It truly is the most elegantly bare-faced scam in human history, but it won’t save them from themselves: like bank vaults, citizen pockets are soon empty, and then a biggy bank somewhere has to go broke, until one day only the ISPs and security services are left.
Which bank will implode first? It’s a mugs game, but an interesting exercise in gambling. And believe me, you can bet your last cent that somewhere in a hedge fund close to you, clients are betting on this very imponderable.
For me, the controversial (but usually sound) Peter Schiff has the right steer on this one. Two months ago in a CNBC interview, he called Bernanke “public enemy number one” and warned that banks would crash if the bond markets collapse. Schiff thinks that, in reality, JPMorgan, Wells Fargo and Bank of America,”are all in big trouble”. His rationale? “The Fed didn’t ask the banks to stress-test a big drop in the bond market because that’s what coming, and the banks would fail that,” he said.
And he’s not wrong. But above all, they – and Goldman for that matter – are well and truly beveraged..as the numbers I gave out a few weeks back confirm: the top nine US banks owe $26 trillion each.
So yes, Mario Draghi will look to calm the bond markets, because the sector that moulded him demands it. And he will start printing and then more printing as a further delaying tactic….but in the end, the European bond market will collapse, and quite a few of the Top Nine Americans will go with it.
and......
Has cash-strapped Spain asked the IMF for a huge €300BILLION bailout? Fears of eurozone meltdown grow as its fourth-biggest economy heads towards bankruptcy
- World finance bosses deny rumours of staggering bailout plan
- But sources say contingency preparations are well under way
- Loans would be from IMF and EU, leaving British taxpayers footing part
- European markets rocky: FTSE-100 plunges to year-long low
- FTSE-100 is 0.87% down; CAC 40 is 1.47% down; DAX is 2.58% down
|
World finance bosses have denied rumours they are planning to stump up a staggering €300billion to bail out Spain and prop up its ailing economy.
The International Monetary Fund said it had not been asked by the nation for the financial help, despite sources saying its European Department was preparing a contingency plan.
The loans, which would come from both the EU and the IMF, would end up costing British taxpayers who would have to foot part of the bill.
World markets are currently rocky due to the fears, with the FTSE-100 plunging to a year-long low.
The FTSE-100 is 0.87 per cent down at 5,274.51; France's CAC 40 is 1.47 per cent down at 2,972.55; and Germany's DAX is 2.58 per cent down at 6,102.50.
Scroll down for live stock market updates...
Talks: Spain's deputy prime minister met with IMF boss Christine Lagarde (left) and U.S Treasury Secretary Timothy Geithner (right), prompting speculation the country wanted a €300billion bailout
Working lunch: German chancellor Angela Merkel sits with European Commission President Jose Manuel Barroso Baltic Sea States leaders earlier this week
Speculation of the plan intensified as Spain's deputy prime minister Soraya Saenz de Santamaria flew into Washington for talks with IMF Managing Director Christine Lagarde and U.S. Treasury Secretary Timothy Geithner.
But all parties insisted the visit was 'routine' and mainly concerned with discussing how Spain can finance an overhaul of its banking sector.
That is a system which has been crippled by nearly €120billion of toxic loans to homeowners and developers. One in four Spaniards are now out of work.
Saenz de Santamaria said that it was 'just a coincidence' that she was coming to Washington in the midst of the banking crisis because her meetings were scheduled months ago.
Desperate: European leaders scrambled to stop the financial crisis in Spain spiralling out of control and infecting other countries such as Italy
But if it is a coincidence, then it is also extremely convenient, seeing as the Spanish economy is this week going through a particularly thorny period.
The government nationalised major bank Bankia earlier this month, and now says it needs to inject $23.6billion in public money into the bank - more than twice what the government had estimated.
And doubts over how recession-hit Spain will handle the bailout have sparked concerns that the country will soon follow Greece, Portugal and Ireland in asking for financial assistance.
The amount it pays on its 10-year government bonds has been rising steadily towards the critical 7 per cent level that saw those three nations begging for financial help.
Today it stands at a worrying 6.57 per cent.
Lagarde called her meeting with Saenz de Santamaria productive. She also denied a Wall Street Journal report that the IMF was drawing up plans for a rescue loan for Spain.
Saenz de Santamaria said that she discussed with Geithner some of the ideas being discussed in Europe about how to set up a fund to recapitalise European banks.
She said: 'The problem is not Spain as a country. But our financial system in a given moment has needs just like the other states had at other times.'
The denial comes as senior European officials last night issued a grave warning that the very survival of the euro is at risk as the crisis in Spain threatens to tear the region apart.
Politicians and central bankers said the situation in the eurozone was unsustainable and drastic action was needed to prevent the ‘disintegration’ of the single currency.
Crisis: Spain's government nationalised major bank Bankia earlier this month, and now says it needs to inject $23.6billion in public money into the bank
'EUROZONE JOBLESS HITS RECORD HIGH AND WILL KEEP ON RISING'
Eurozone unemployment has hit a record high and job losses are likely to keep climbing as the debt crisis eats away at businesses' ability to hire workers while indebted governments continue to cut staff.
Around 17.4million people were out of work in the 17-nation eurozone in April (11 per cent of the working population) - the highest level since records began in 1995, the EU's statistics office Eurostat said today.
'This 11 percent level is going to continue edging up in the coming months and probably until the end of the year,' said Francois Cabau, an economist at Barclays Capital who sees the eurozone's economy contracting 0.1 per cent this year.
'The economic activity situation tells you the story of the labour market. There's been basically no economic growth since the fourth quarter of last year and indicators are pointing to very weak growth momentum for the second quarter,' he said.
ING economist Martin van Vliet said he sees the unemployment rate reaching slightly above 11.5 per cent if the economy starts to recover later this year. But if the downturn worsens, 'the risk is for an even higher peak in unemployment,' he said.
As the debt crisis intensifies, companies in the euro zone are trying to keep their labour costs low as they struggle with falling demand and profits, while a German-led drive to cut deficits and debt is pressuring governments to shrink spending.
But some economists say austerity policies in an economic downturn are self-defeating because governments receive less tax receipts as unemployment grows and must pay out more money in jobless benefits.
They spoke out as European leaders scrambled to stop the financial crisis in Spain spiralling out
They spoke out as European leaders scrambled to stop the financial crisis in Spain spiralling out of control and infecting other countries such as Italy.
The euro crashed to a 23-month low against the US dollar at $1.2335 but was up slightly against sterling having recovered from its lowest level since late 2008. Last night, £1 was worth €1.2460.
Mario Draghi, president of the European Central Bank, said the eurozone was unsustainable in its current form.
In his sharpest criticism yet of eurozone leaders’ handling of the crisis, he said the European Central Bank could not ‘fill the vacuum’ left by governments in terms of economic growth or structural reforms.
And he called for overwhelming force to be used to shore up Europe’s battered banks to restore confidence in the financial system.
Ignazio Visco, governor of the Bank of Italy and a senior ECB member, said political inertia and bad economic decisions have put ‘the entire European edifice’ at risk.
‘There are growing doubts among international investors about governments’ ability to ensure the survival of the single currency,’ he said.
Olli Rehn, EU economic and monetary affairs commissioner, said bold action was required ‘if we want to avoid a disintegration of the eurozone’.
The apocalyptic tone from usually measured EU officials betrayed the spreading sense of panic.
* * *
and....
http://www.zerohedge.com/news/overnight-sentiment-bath-salty
Overnight Sentiment: Bath Salty
- Auto Sales
- Bond
- CDS
- Crude
- Crude Oil
- Economic Calendar
- Equity Markets
- Eurozone
- Gilts
- Greece
- Investor Sentiment
- Natural Gas
- Nikkei
- Personal Income
- recovery
- Switzerland
- Unemployment
- United Kingdom
- Volatility
Just about an hour before the US non-farm payroll number is expected to print, and finally resolve the lingering question whether the Chairman will print in 3 weeks, things in Europe have gone from horrible to zombie. A series of horrendous economic reports out of Europe including record Eurozone unemployment, a confirmation of the final European PMI plunge including the second largest monthly decline on record in UK manufacturing, and various soundbites from Syriza's Tsipras, have pushed the EUR to fresh two year lows, Spanish CDS to new all time wides...
...German 2 Year bonds joining Switzerland in negative terriroty, and finally, Bloomberg, as noted earlier, to be "testing" a placeholder for a post-Euro Drachma. As BBG summarizes: "European markets fall, led by consumer & tech stocks with the German market underperforming. The euro falls against the dollar and German 2-yr yields drop into negative territory. Chinese manufacturing PMI data below expectations, though above the 50 level; European manufacturing PMI in line with expectations, below 50. Euro-zone unemployment met expectations and seems likely Irish voters endorsed the EU fiscal treaty. Commodities fall, led by oil & natural gas. U.S. nonfarm payrolls, unemployment data due later." In summary - all data today fits with Raoul Pal's less than optimistic presentation from yesterday.
Summary from BofA
In focus
Markets are increasingly worried about the situation in Europe. Real yields on safe havens such as US Treasuries, German bunds and UK gilts are all negative. Investors appear more concerned about getting their principal back then making a return on their money. Today's US employment report could further increase negative sentiment among investors. The market is looking for +150,000 for today's NFP figure but we are below consensus at 140,000. A bad report could send markets swooning while a strong report might renew investor hope that the US can drive global growth. We are skeptical of the US driving global growth. Our expectations are that the fiscal cliff looming at the start of 2013 will slow growth throughout the rest of this year. To read more about the fiscal cliffhanger see: US Economic Viewpoint, 30 May 2012.
Market action
More signs that the uncertainty stemming from the Euro crisis is weighing on investor sentiment. Investors are getting less bullish on stocks according to our US Equity Strategy team's Sell Side Indicator. After triggering a Buy signal last month, their measure of Wall Street bullishness on stocks declined again, marking the eighth time in ten months that the indicator has fallen. The 4.0pp decline pushed the indicator down to 50.2, its lowest level in nearly 15 years, suggesting that sell side strategists are now more bearish on equities than they were at any point during the collapse of the Tech Bubble or the recent Financial Crisis.
In Asian most equity markets finished lower with the regional MSCI Asia Pacific index shedding 1%. Japan's Nikkei lost 1.2% and the Indian Sensex slid 1.7%. The Korean Kospi fell 0.5% and the Hang Seng lost 0.4%. On the flip side the Shanghai Composite managed to finish 0.1% higher. Investors there are hoping that the weak manufacturing PMI will awaken policymakers to the country's slowdown and result in growth enhancing measures.
European equities continue to slide as worries over Spain, Greece and the future of the euro area weigh on investor sentiment. Until investors see a concrete solution to the problems plaguing the euro area, the region's equities are likely going to continue falling. In the aggregate, European equities are down 1.2%. At home, equities are set to tumble. Futures on the S&P 500 are pointing to a 1.3% lower open today.
In bondland, Treasuries are bid with the five year down 1bp, the 10-year down 2bp and the long bond down 3bp. Currently the 10-year yield is trading at 1.54%. Europe's safe havens are also bid with the German bund down 3bp to 1.16% and the UK gilt down 6bp to 1.51%.
The dollar, another safe haven, is bid as well. The DXY index is up 0.3%. Commodity prices are lower due to the dollar’s strength. WTI crude oil is $1.50 a barrel lower. Gold is beginning to lose some of its luster as a safe haven for investors. Today the yellow metal is down $7.55 an ounce to $1,552.92. Since September, gold is down over $347 an ounce.
Today’s events
The economic calendar is crowded today. Kicking things off will be the May employment report at 8:30 am. We expect non-farm payrolls to increase 140,000 in May, leaving the three month moving average to slow to 128,000. To read a full preview see the Payroll Preview section below.
The economic calendar is crowded today. Kicking things off will be the May employment report at 8:30 am. We expect non-farm payrolls to increase 140,000 in May, leaving the three month moving average to slow to 128,000. To read a full preview see the Payroll Preview section below.
Also at 8:30 am, we have the April personal income and outlay report. We expect personal income and spending to increase 0.2% in April. Job growth was sluggish in April and wages were flat, which does not bode well for compensation growth. On the spending side, core retail sales increased 0.4% but auto sales slipped lower. Moreover, a decrease in prices should translate to slower nominal spending. We look for headline PCE to decline 0.16% in April, leaving real consumer spending up 0.3%.
At 10:00 am, we have the April construction spending report and the May ISM manufacturing survey. Construction spending is likely to increase 0.6% in April, following a 0.1% increase in March. Meanwhile, we expect the ISM Manufacturing Index to moderate to 53.5 in May from 54.8 in April.
Throughout the day, vehicle manufacturers will be reporting on their May vehicle sales. In our view, vehicle sales are likely to reach a seasonally adjusted annualized selling rate of 14.3 million units in May.
Payroll preview
We expect non-farm payrolls to increase 140,000 in May, leaving the three month moving average to slow to 128,000. This is a marked deceleration from the three month average gain of 252,000 from December through February. As we have been arguing for some time, we believe this swing can largely be explained by the abnormally warm weather in the winter. This is obvious in construction jobs, but other sectors such as leisure/hospitality and retail trade exhibited some seasonal volatility. We suspect that job growth in these three sectors will remain soft in May. We expect the government to shed 10,000 jobs in May as state and local governments as well as the federal government continue to reduce headcount. This means private payrolls will be up 150,000.
The household survey, which provides the estimate for the unemployment rate, has been particularly noisy lately. Starting in the fall of last year through February, the household survey showed job gains of an average of 385,000 a month. Despite these gains, the participation rate continued to edge lower, pushing down the unemployment rate. Job growth started to reverse in March, with a contraction in both March and April. While we do not expect another decline in jobs in April, the household measure of employment is likely to look soft. In addition, the labor force participation rate could tick up modestly to reverse some of the recent sharp declines. This would push the unemployment rate up to 8.2% from 8.1% last month (unrounded last month 8.098%).
With slow job growth and high unemployment, we expect wages to remain soft. We forecast average hourly earnings to only increase 0.1% mom in May after unchanged earnings in April. This would translate to a tepid 1.7% yoy gain. We expect the workweek to hold at 34.5 in May. The good news for payrolls is that hours worked have returned to pre-recession levels, which means that businesses can no longer rely on increasing hours of the current workforce to meet greater demand; they will have to hire. Businesses have responded by hiring a disproportionate number of temporary and part-time workers, reflecting the uncertain nature of this recovery.
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