US non-farm pay­roll comes to the res­cue


Kuwait Times - - BUSINESS -

Over the past sev­eral months US eco­nomic in­di­ca­tors have been com­ing in be­low mar­ket ex­pec­ta­tions, which were el­e­vat­ing the like­li­hood for the Fed to change its mone­tary tra­jec­tory. How­ever, after the re­lease of the ro­bust jobs re­port, the data strength­ened the case for the cen­tral bank to tighten its mone­tary stance as it claimed it would ear­lier in the year , es­pe­cially when the Fed set a low and grad­ual bar for bal­ance sheet nor­mal­iza­tion to be­gin in Septem­ber.

When the ro­bust non-farm reached the mar­ket, prices of US gov­ern­ment debt fell and US eq­uity in­dices em­braced the news. The lat­est jobs re­port for the US econ­omy ap­peared to tick all the boxes when the fig­ures were re­leased, fa­vor­able job gains, lower un­em­ploy­ment rate and a higher par­tic­i­pa­tion rate. But as al­ways, there was one cru­cial com­po­nent miss­ing.

Earn­ings have been be­low his­tor­i­cal lev­els since the global fi­nan­cial cri­sis, de­spite on­go­ing jobs gains for al­most a decade. Earn­ings did rise by 0.3 per­cent for the month, how­ever on an an­nual ba­sis the mo­men­tum has been rel­a­tively steady at 2.5 per­cent. The jobs re­port is mostly a his­tor­i­cal in­di­ca­tor on the US econ­omy, while PMI fig­ures in­di­cate fu­ture growth prospects. We have been wit­ness­ing slower growth in PMI data for the US, but in the eu­ro­zone mar­kets are see­ing bet­ter num­bers of PMI in­di­ca­tors.

On the global outlook, con­di­tions are im­prov­ing and la­bor mar­kets have tight­ened even more and above-trend growth is ex­pected in a num­ber of ad­vanced economies. Al­though, low growth in wages seems to be a global risk in most coun­tries. Head­line in­fla­tion rates have de­clined re­cently, largely re­flect­ing the ear­lier de­cline in oil prices. The IMF has raised its growth ex­pec­ta­tions for China and the eu­ro­zone, while trim­ming those for the United States and Bri­tain. The Fund said the eu­ro­zone’s re­cov­ery was firm­ing and be­com­ing broad-based, with stronger do­mes­tic de­mand.

On the cur­rency front, the Dol­lar started the week on a down­ward trend and touched a 15 months low at 92.548 on Wed­nes­day. The green­back has been pres­sured on many fronts by po­lit­i­cal ten­sion in Wash­ing­ton, unin­spir­ing eco­nomic data and es­pe­cially slug­gish in­fla­tion, which is adding to un­cer­tainty about the pace of fu­ture Fed­eral Re­serve pol­icy tight­en­ing. More­over the DXY was fur­ther sub­dued when com­mu­ni­ca­tions di­rec­tor An­thony Scara­mucci was fired last week after only 10 days since his ap­point­ment by the Pres­i­dent. Scara­mucci was the 7th se­nior White House of­fi­cial to be let go in the six month. In the end of the week, the DXY was on track for a fourth con­sec­u­tive weekly loss, how­ever that all changed after the strong jobs re­port. The DXY re­bounded from 92.776 to 93.774, a 1 per­cent gain. The in­dex closed the week at 93.542

The sin­gle cur­rency be­gan the week on a pos­i­tive tone after the eu­ro­zone core CPI rose to a four-year high. The EUR/USD kept its mo­men­tum and on Wed­nes­day the pair rose to 2.5 years high as the US pri­vate sec­tor em­ploy­ment re­port failed to in­spire the mar­ket. On Fri­day, the pair toke a turn after the US non­farm pay­roll sup­ported the Dol­lar. The EUR/USD de­pre­ci­ated 1 per­cent due to the data. The pair opened the week at 1.1758 and ended the weekly ses­sion at 1.1768.

The ster­ling pound took a beat­ing last week as mar­kets per­ceived the BoE’s tone as dovish, when the bank cut its growth and wages fore­casts. The Ster­ling Pound has been ap­pre­ci­at­ing re­cently due to the weak­ness in the Dol­lar. When the Non-Farm pay­roll came out, the GBP/USD con­tin­ued its down­ward trend. The Ster­ling pound closed on Fri­day at 1.3035 and was down by 0.85 per­cent for the week.

The Ja­panese Yen opened the week at 110.63 and rose to a weekly high of 111.04 on Fri­day after the pos­i­tive US jobs re­port reached the mar­ket. The pair man­aged to close 4 points higher at 110.67 in what proved to be an un­event­ful week for the cur­rency.

The Swiss Franc ended the month as the only ma­jor cur­rency not gain­ing any ground against a slug­gish US dol­lar. The Swissie also ended the month of July down 4.7 per­cent against the Euro, its big­gest monthly fall since 2011. Sev­eral an­a­lysts, viewed last week’s sharp fall as a “catch-up” for the franc, which had been hold­ing its level against the euro de­spite the lat­ter’s sig­nif­i­cant gains against other cur­ren­cies, par­tic­u­larly the dol­lar. USDCHF opened the week at 0.9688 and man­aged to close the week at 0.9727.

In the com­modi­ties com­plex, the price of oil was el­e­vated at the start of last week as in­vestors weighed the po­ten­tial for the US to im­pose sanc­tions against Venezuela. This could re­sult in a short­age of oil in­ven­to­ries given that Saudi Ara­bia is al­ready ship­ping less oil to the US. The price of Brent crude oil rose to $53.35, the high­est since late May and ended on Fri­day at 52.98.

A ro­bust la­bor mar­ket

The Amer­i­can econ­omy cre­ated 27,000 more jobs than ex­pected com­ing at 209,000 and em­ploy­ers paid higher wages for their em­ploy­ees In July. June’s em­ploy­ment gain was re­vised higher by 9,000 to 231,000. The jobless rate ticked lower again to a 16-year low from 4.4 per­cent to 4.3 per­cent. US earn­ings a key com­po­nent of the jobs re­port rose 0.3 per­cent after ris­ing 0.2 per­cent the pre­vi­ous month, how­ever on an an­nual ba­sis the rate re­mained changed at 2.5 per­cent. That’s be­low the 3.5 per­cent to 4 per­cent that is typ­i­cal when the un­em­ploy­ment rate is this low.

Over­all, the fig­ures in­di­cate that em­ploy­ers re­main op­ti­mistic about their busi­nesses and fu­ture con­sumer de­mand. The gains may fuel higher spend­ing by US cit­i­zens, which ac­counts for two-thirds of the eco­nomic ac­tiv­ity. Al­though, em­ploy­ers are still hir­ing at a strong pace, sug­gest­ing em­ploy­ers have plenty of work­ers to choose from and won’t have to raise pay. The is an is­sue for the Fed be­cause they have raised short-term in­ter­est rates three times in the past seven months, based on the idea that em­ploy­ers will soon have to pay more to at­tract work­ers

US PMI in­di­ca­tors

The Chicago Busi­ness Barom­e­ter kept on ex­pand­ing for the month of July, how­ever the in­dex has cooled down from ear­lier in the sum­mer. The Chicago PMI fell from June’s 65.7 to a three months low of 58.9 as new or­ders in­dex de­clined by 11.6 points to a 5-month low, while the pro­duc­tion in­dex re­treated 6.9 points.

In a sep­a­rate sur­vey, 70 per­cent of com­pa­nies in the last year claimed that they have in­creased the pay for their em­ploy­ees. Yet a ma­jor­ity of firms still aren’t in­creas­ing wages as much as they nor­mally would when the un­em­ploy­ment rate is near a 16-year low at 4.3 per­cent. The in­dex re­mains op­ti­mistic even as much of the pres­i­dent’s agenda, in­clud­ing tax cuts, dereg­u­la­tion and a boost to in­fra­struc­ture spend­ing have stalled. All the com­po­nents of the in­dex re­treated last month but re­mained above their re­spec­tive 12-month av­er­ages.

In the man­u­fac­tur­ing sec­tor, the pace of growth ex­panded in July, but at a slower rate than the pre­vi­ous month. The ISM Man­u­fac­tur­ing In­dex de­scended to 56.3 from 57.8 due to a slow­down in the com­po­nents of em­ploy­ment and new or­ders. So far in 2017, the in­dex has av­er­aged a read­ing of 56.4, sig­nif­i­cantly bet­ter than the 51.4 av­er­age two years ago. The ser­vice sec­tor also grew at a slower rate in July, fol­low­ing the same mo­men­tum as the man­u­fac­tur­ing in­dus­try. The non-man­u­fac­tur­ing in­di­ca­tor was knocked down 3.5 points to 53.9 ver­sus an ex­pec­ta­tion of a rise to 57. Fo­cus­ing on the sub-com­po­nents of the ser­vice sec­tor, the busi­ness ac­tiv­ity in­dex con­tracted by 4.9 points, while new or­ders shrank by 5.4 points.

In­fla­tion re­mains sub­dued

A closely watched in­di­ca­tor on US in­fla­tion by the Fed­eral Re­serve (PCE) was lower in June as spend­ing on fuel de­creased due to fall­ing oil prices. Year to year, the PCE in­dex rose 1.4 per­cent, down from May’s 1.5 per­cent read­ing, well be­low the 2.2 per­cent seen in Fe­bru­ary. Ex­clud­ing food and fuel price changes the core PCE re­mained flat at 1.5 per­cent. The re­cent in­fla­tion fig­ures fur­ther re­duce the chances that the cen­tral bank will el­e­vate in­ter­est rates again this year and the like­li­hood of a hike in De­cem­ber is around 30 per­cent. The US econ­omy should ben­e­fit as the dol­lar in­dex has de­pre­ci­ated nearly 10 per­cent since the start of the year by gen­er­at­ing higher in­fla­tion, but with wage growth re­main­ing sub­dued the mar­ket con­tin­ues to doubt the prospect of mean­ing­ful rate rises from the Fed­eral Re­serve.

Ro­bust Euro­pean mo­men­tum

The ECB’S pre­ferred in­di­ca­tor on in­fla­tion Core CPI rose to four-year high, while head­line in­fla­tion re­mained flat. The Flash Core CPI in­creased by 0.1 per­cent to 1.3 per­cent against an ex­pec­ta­tion of a drop to 1.1 per­cent. The lat­est fig­ures on price growth val­i­dates the ECB’s state­ment that de­fla­tion­ary risks have dis­ap­peared, how­ever the lat­est fig­ures re­main well be­low the ECB’s tar­get of 2 per­cent. On the em­ploy­ment front, the eu­ro­zone un­em­ploy­ment rate in June de­clined to the low­est level since Fe­bru­ary 2009. The jobless rate fell to 9.1 per­cent from the 9.2 per­cent recorded in May. On an an­nual ba­sis, the un­em­ploy­ment rate dropped 1 per­cent as growth in Europe has been sup­ported by a low in­ter­est rate en­vi­ron­ment. Europe’s largest econ­omy recorded the low­est un­em­ploy­ment rate at 3.8 per­cent, the low­est rate since the post-re­uni­fi­ca­tion era. On the outer edges of Europe, the jobless rate re­mains far from the rates recorded be­fore the fi­nan­cial cri­sis, sug­gest­ing there still is room for im­prove­ment in the la­bor force. Over­all, the prospects of higher wages have in­creased since the rate of un­em­ployed cit­i­zens in the la­bor force fell to mul­ti­year lows and con­sumer in­fla­tion soared to 4 years high.

The first es­ti­mate of growth for the sin­gle block econ­omy is ex­pected to ad­vance at a rate of 0.6 per­cent in the sec­ond quar­ter, from 0.5 per­cent recorded in the first quar­ter. Year on year, growth is pro­jected to ex­pand at a rate of 2.1 per­cent from 1.9 per­cent, the best level in five years. The lat­est num­bers re­in­forces the view that econ­omy con­tin­ues to ac­cel­er­ate after two years of mas­sive as­set pur­chases by the ECB and al­most 1.5 years of neg­a­tive in­ter­est rates. The econ­omy has now ex­panded for 17 con­sec­u­tive quar­ters. Look­ing at the big pic­ture, the econ­omy is per­form­ing pretty well com­pared to the rest of the world, which strength­ens the case for the ECB to ta­per its as­set pur­chases next year.

In Ger­many, shop­per’s con­fi­dence in spend­ing was el­e­vated in June help­ing re­tail sales to its best monthly gain since Oc­to­ber 2016. On a monthly ba­sis, re­tail sales in­creased 1.1 per­cent, from May’s 0.5 per­cent. The Ger­man econ­omy has been as­sisted by a record low un­em­ploy­ment rate, which added 657K jobs be­tween June 2016 and June 2017. Con­sump­tion has over­taken ex­ports as the main driver of growth, sup­ported by a ro­bust la­bor mar­ket and low in­ter­est rates. The lat­est data on re­tail sales will re­in­force a set of eco­nomic and busi­ness sur­veys from the Ger­man econ­omy, which have all pointed to a ro­bust end for the sec­ond quar­ter.

One more dovish mem­ber on the MPC

The BoE’s Mone­tary Pol­icy Com­mit­tee voted 6-2 to hold the Bank Rate at a record low of 0.25 per­cent and its as­set pur­chase tar­get at GBP 435 bil­lion. Com­pared to the June meet­ing, the vote split was 5-3 due to the hawk­ish mem­ber Kristin Forbes, who has been re­placed by Sil­vana Ten­reyro a more dovish MPC mem­ber. The BoE an­tic­i­pates a 1.7 per­cent in­crease by year-end and 1.6 per­cent for 2018. Both fig­ures were re­vised down from prior pro­jec­tion of 1.9 per­cent and 1.7 per­cent re­spec­tively. Wage growth ex­pec­ta­tions were also trimmed down by 0.5 per­cent for 2018 and 2019, how­ever no ma­jor changes were made for in­fla­tion ex­pec­ta­tions.

BoE Gov­er­nor Car­ney stated “It is clear that Brexit un­cer­tain­ties are weigh­ing on the de­ci­sions of some busi­ness. We see it di­rectly in the macroe­co­nomic num­bers, in­vest­ment has been weaker than we oth­er­wise would have ex­pected.” More­over, a se­ries of sur­veys for Bri­tain’s man­u­fac­tur­ing, con­struc­tion and ser­vices sec­tors pub­lished last week sug­gested the econ­omy re­mained in a low gear in July and re­cent fig­ures have shown the econ­omy had its slow­est growth since 2012 in the first half of this year. Look­ing at the yield curve, the bank ex­pects just two hikes over a three year hori­zon. The bank’s mone­tary pol­icy is likely to re­main data de­pen­dent and fu­ture eco­nomic in­di­ca­tors may re­main sub­dued as con­sumer’s real in­come con­tin­ues to shrink and firms wait for more clar­ity on the Brexit process.

Mixed sig­nals from UK’s PMI fig­ures

Bri­tish man­u­fac­tur­ers re­cov­ered from a 7month low posted in June as ex­port or­ders soared to the high­est in 7 years. The Ster­ling’s de­pre­ci­a­tion since the vote to leave the EU ap­pears to be pro­vid­ing sig­nif­i­cant sup­port for man­u­fac­tur­ers by boost­ing ex­ter­nal de­mand. On the other side of the lever, out­put growth in the in­vest­ment and in­ter­me­di­ate goods sec­tors hit its low­est in eight and five months re­spec­tively. The man­u­fac­tur­ing in­dex re­bounded from 54.2 to 55.1, how­ever the in­dex re­mains be­low the av­er­age seen in the first half of the year at 55.3.

Growth in Bri­tain’s con­struc­tion sec­tor eased last month to the low­est level since the vote to leave the Euro­pean Union. The sec­tor has been pres­sured on sev­eral fronts from po­lit­i­cal un­cer­tain­ties due to Brexit, in­vestors’ appetite to in­vest in the econ­omy and a rise in ma­te­rial prices. The con­struc­tion in­dex came in at 51.9, from 54.8 in June. Lower lev­els of com­mer­cial con­struc­tions were a key fac­tor hold­ing back the sec­tor, which con­tracted from 52.5 to 47.6. The prices for con­struc­tion ma­te­ri­als in­creased at one of the sharpest rates since the first half of 2011, gen­er­ated by a weaker cur­rency. The sur­vey in­di­cated that busi­nesses and in­vestors cited de­lays in de­ci­sion mak­ing, mainly as­so­ci­ated to wor­ries about the eco­nomic outlook and height­ened po­lit­i­cal un­cer­tainty. The Of­fice for Na­tional Sta­tis­tics es­ti­mated that the sec­tor shrank 0.9 per­cent in the sec­ond quar­ter of 2017.

In the ser­vice sec­tor, busi­ness ac­tiv­ity im­proved gen­tly in July from a four-month low recorded in June, but the rate of ex­pan­sion re­mained rel­a­tively sub­dued. The start of new busi­ness was one of the weak­est seen since last au­tumn. Mean­while, staff re­cruit­ment con­tin­ued to gain trac­tion, reach­ing its strong­est pace since the start of 2016. In­put costs re­mained strong in July, driven by ris­ing food prices, en­ergy bills and salary pay­ments. Hence, op­er­at­ing ex­penses led to the fastest in­crease in av­er­age prices charged by ser­vice sec­tor firms in three months. The in­dex edged up by 0.4 points to 53.8. The three PMI sur­veys are broadly con­sis­tent with eco­nomic growth of just over 0.3 per­cent in the sec­ond quar­ter of 2017.

Chi­nese and Ja­panese man­u­fac­tur­ers

China’s man­u­fac­tur­ing sec­tor grew for the 12th con­sec­u­tive month, how­ever the pace of growth was slower in July. The slower mo­men­tum is at­trib­uted to weaker de­mand for Chi­nese goods glob­ally. The man­u­fac­tur­ing in­dex fell by 0.2 points to 51.4 as new ex­port or­ders slipped to 50.9 from June’s 52.0. The sec­tor has been sup­ported by in­vest­ments in con­struc­tion that has fu­elled de­mand for ev­ery­thing from ce­ment to steel and other build­ing ma­te­ri­als. The con­struc­tion in­dex rose to a three-year high in July as the Chi­nese econ­omy in­vests in in­fra­struc­ture. In the ser­vices sec­tor, growth also ex­panded at a slower rate, fall­ing from a three-month high of 54.9 in June to 54.5. Eco­nomic growth may ease in com­ing months as the gov­ern­ment adopts stricter fi­nan­cial reg­u­la­tion, which may in­crease the cost of bor­row­ing for busi­nesses.

In Ja­pan, the man­u­fac­tur­ing sec­tor in July ex­panded at the slow­est rate in eight months as ex­port de­mand weak­ened. The fi­nal read­ing for new ex­ports de­clined by 2.5 points to 50.9. On the do­mes­tic front, new or­ders did not soften as sharply, which as­sisted to off­set the weak­ness in overseas de­mand. De­spite the softer data, the PMI in­dex re­mained above the 50 thresh­old for the 11th con­sec­u­tive month, in­di­cat­ing 11 con­sec­u­tive months of growth. Data pro­vided by the gov­ern­ment showed that busi­nesses ex­pect out­put to ac­cel­er­ate back in Au­gust, giv­ing hope that in­dus­trial pro­duc­tion will con­tinue to ex­pand at a healthy pace. The man­u­fac­tur­ing PMI fell to 52.1 from June’s 52.4. Over­all, Ja­pan’s econ­omy is ex­pand­ing at a mod­est pace, the la­bor mar­ket is tight­en­ing but in­fla­tion re­mains far from the BoJ tar­get.

Aus­tralian econ­omy

The Re­serve Bank of Aus­tralia kept its bench­mark rate un­changed as ex­pected at a record low of 1.5 per­cent as the econ­omy wres­tles with a strong cur­rency and weak in­fla­tion. The AUD has ap­pre­ci­ated re­cently due to the weak­ness in the US dol­lar, which has in­creased the prob­a­bil­ity of sub­dued price pres­sures and may neg­a­tively im­pact the coun­try’s ex­port de­mand. There were no ma­jor changes in the bank’s fu­ture ex­pec­ta­tions for the econ­omy and the RBA pre­dicts that the econ­omy will ex­pand at an an­nual rate of around 3 per­cent. The RBA’s Gov­er­nor Philip Lowe said “We are in­tent on de­liv­er­ing Aus­tralians an av­er­age rate of in­fla­tion over time of be­tween 2 and 3 per­cent. We are seek­ing to do this in a way that sup­ports sus­tain­able growth in the econ­omy and that best serves the pub­lic in­ter­est.”

Em­ploy­ment growth has been stronger over re­cent months, and var­i­ous for­ward-look­ing in­di­ca­tors point to con­tin­ued growth for fu­ture em­ploy­ment. Against this, wage growth re­mains low and house­hold debt is al­ready at 190 per­cent of dis­pos­able in­come, which could limit con­sumer spend­ing.

Kuwait Kuwaiti di­nar at 0.3190

The USDKWD opened at 0.30190 yes­ter­day morn­ing.

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