US Jobs Data on Tap, but Don’t Expect Miracles

The focus is squarely on the US employment
data today, ahead of which the capital markets are mostly consolidating
yesterday’s Bank of England inspired moved. 
The Australian and New Zealand dollars, alongside sterling, which is up about half a
cent after losing two yesterday.  
The RBA’s
monetary policy statement failed to tell investors anything they did not
already know.
 There was not formal bias expressed, but
the fact that the central bank expects inflation to undershoot its target over
the forecasting period keeps many watchful for another rate cut.   While
this is possible of course, we think those who expect a quick follow up move
may be disappointed.  Meanwhile, the market has next week’s RBNZ move fully discounted.      The
attractiveness of these currencies is that even after the rate adjustments,
they are still the highest among the high income countries, and as the BOE
underscored, rates will be lower for longer.  
The nearly flat
US jobs growth in May continues to bedevil participants even though the June
series snapped back–from the weakest in six years to the strongest in eight
  Most guesses for July appears to be gravitating around the
average so far this year, which is 172k.  Many look for the unemployment
rate to ease back to 4.8% from 4.9%.  A 0.2% increase in average hourly
earnings is needed to keep the year-over-year pace at 2.6%.  
economists, including those at the Federal Reserve, recognize that as full-employment is
reached the monthly jobs growth will slow. 
 Indeed, this appears to be slowly happening.
 Consider that in 2014; monthly
non-farm payrolls averaged 251k.  Last year’s average was 229k.  
Investors and policymakers are trying to decipher this year’s trend, which is
made more difficult by the recent
There seems to
be an asymmetrical risk associated with today’s employment report.  
Strong jobs growth is unlikely to materially boost the market perception of the odds
of a September hike.  There is, after all, another jobs report the
FOMC will see prior to its decision late
next month.  A disappointing report would more likely impact market
expectations.   This is to say that the dollar is more likely to fall on a
weaker report than sustain gains on a strong one.  
After the
Antipodean currencies, the yen is the strongest of the majors, though within
the ranges established in the past two sessions after posting an outside down
day on Tuesday that saw the greenback dip below JP100.70.  
Yesterday a BOJ official seemed to play
down the need for more monetary stimulus, while earlier today, Japan reported
an unexpected, though highly desired, jump in labor cash earnings.  The
median forecast was for a 0.3% increase in June from a year ago.  Instead, labor cash earnings rose 1.3%.  When adjusted for inflation,
this is a 1.8% increase, more than four-times what the market anticipated.
 This is the strongest pace in six
years.  Although the Japanese labor market is tight, wages have not risen,
and this is understood to be a major
restraint on consumption.   
The economic
news from Europe is not as favorable, though the euro is firm, fully recovering
yesterday’s losses. 
 German factory orders fell 0.4% in
June.  The market had forecast an increase of roughly the same magnitude.
 The May series was revised to 0.1%
from flat, but this does little to blunt the impact and warn of the risk of a
weaker industrial output figure next week.  
Italy and Spain
reported June industrial production figures today. 
 Italy’s disappointment is worrisome.  Rather
than recover from May’s 0.6% slide, Italian industrial output fell 0.4%.  This keeps the pattern since Q1 15 intact.
 In this pattern, Italian industrial rises one month every quarter and
falls in other two.  
If the
now-November constitutional referendum is really
going to be a referendum on Renzi, it would be more helpful if the economy were
showing greater strength. 
 We are still watching to see if
Renzi can backtrack from his threat to resign if the referendum does not pass.
 It seems, at least from the outside, reckless to tie the future of the
government, which has provided political stability, to the referendum.  
Spain reported June industrial output rose 0.2%.
is better than Italy’s decline but
was below expectations (0.5%) after a 0.5% fall in May.  The recent string
of data suggests that the Spanish economy is moderating after a period of
outperformance.   Remember too that Spain still has been unable to form a
government after an two elections (December 2015 and June 2016).  Rajoy is
leading the caretaker government, but it does seem that if he were to offer to
step down and allow and PP official replace him, a center-right government
could be fairly quickly formed. 
Canada reports
its July employment data at the same time as the US.
  In June, Canada lost less than one
thousand jobs, but this masked a 40k fall in full-time positions.  
Proportionate to the size of the economy, it would be as if the US lost
150k-200k jobs.  Although the Canadian economy did contract 0.6% in May
(the third monthly decline in activity in the first five months of the year),
the magnitude of the loss seems exaggerated  The data may be skewed by a seasonal distortion, such as
school teachers.
The US and
Canada report June trade figures as well today.
  The US reports an advanced estimate of merchandise trade, and it has
removed some volatility from the final report.  A slightly wider deficit
is expected (~$43 bln from ~$41 bln).  When adjusted for inflation, it
could impact expectations for revisions to Q2 GDP, which currently seem biased
to the downside.   Canada will likely report a smaller merchandise trade
deficit.  The May shortfall was a record C$3.3 bln.  Recall that
non-oil exports fell.  Most look for small improvement to a C$2.8 bln
deficit, which would still be large for Canada.  
The US dollar
has been able to distance itself from support near CAD1.30.
  The Canadian dollar has lagged the
other dollar-bloc currencies.  The combination of the recovery in oil
prices, less disadvantageous interest rate differential with the US, and the
recovery in equity prices today could see
the CAD1.30 area give way.    If so, chart-based support may not be
found until closer to CAD1.2860.  
Lastly, we return to the BOE decision
succeeded when many other central banks have struggled in getting ahead of the
curve of expectations.  The 25 bp rate cut was, though widely anticipated.
 The central bank has a clear easing bias with another 10-15 bp cut likely
in Q4.  Carney explicitly rejected negative interest rates. 
The GBP70 bln
asset purchase program, of which GBP10 bln will be corporate bonds was more
than many had anticipated.
  Of note, the ECB appears to be
buying a small amount of nearly every corporate bond it can.  Carney
indicated that BOE wold buy those investment grade bonds of corporations that
it judges make a material contribution to the UK.  The program is
projected to be complete in six months.  
The BOE also
announced a “Term Funding Scheme” (TFS), which is similar to the
TLTROs of the ECB. 
 Banks (and building societies) can
have access to four-year funding from the central bank at a rate close to the
base rate (now 25 bp) compared with the cost of funding
that was nearer 1.0%. The lenders must maintain or expand their lending or face
higher costs and loss of access to the facility.  This GBP100 bln facility
is bigger than the QE purchases but is also funded by the creation of new bank
reserves (central bank money).  
Despite the Bank of England doing more
than the market expected, its economic assessment is not as dour as many in the
private sector.
central bank expects growth to slow to 0.1% this quarter than then be stagnant
in Q4 and Q1 17.  It is not clear whether this that the UK escapes a
recession, as there is no agreed upon definition of a recession.  Two
consecutive quarters of negative growth is not a technical definition but a
rule of thumb, and one, incidentally, that is not used in the US by the NBER
that is the official arbiter.   

One criticism
that has been levied at central banks is
their hubris regarding the power of monetary policy. 
 If that criticism is valid, which we have our doubts,
Carney addressed it head-on.  He was explicit.  The shock to the
economy can be cushioned but not overcome by monetary policy, seemingly hinting
without being explicit, that there is a role for fiscal support.  Yet he defended monetary
action, noting that it is the first line of defense and can be brought to bear
quicker than fiscal policy. 

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