US
ISM indexes for both the manufacturing and non-manufacturing sectors showed activity picked up in June. This news, however, paled in comparison to the blockbuster job report on Friday, which reported 287k positions added to non-farm payrolls in the month.
The diffusion index showing the proportion of private industries adding jobs rose to 62.4, up from just 48.1 in May and the highest level since July of last year.
Meanwhile, after falling to 4.7% in May, the unemployment rate ticked back up to 4.9%, still the second lowest level of the recovery to date. The story for the unemployment rate was less about the rate of job growth and more about the ebb and flow of workers in and out of the labor force.
After falling in April and May, the labor force participation rate ticked back up in June. The re-entry of 414k workers into the job market swamped the pace of job growth, adding 347k to the ranks of the unemployed. This may seem esoteric, but it is a trend to watch. The more workers come back to the labor market, the less the Federal Reserve has to be concerned that the scars of past economic weakness have become permanent, leaving it more room to remain accommodative.
There are limits to how much backward looking data can change the post-Brexit lower-for-longer narrative. Even while pushing a few basis points higher from the week’s lows, the US 10-year yield continues to hover around 1.4%, down nearly 35 basis points from the eve of the UK referendum.
UK
Seven of the largest real estate funds have frozen assets worth more than half of the total GBP 25 billion saved in similar funds, after Britain’s shock vote to leave the European Union sparked a flurry of redemptions.
The Confederation of British Industry (CBI) will publish the latest survey regarding the industry. Expect business optimism to be gloomier in July. The first GDP estimate for Q2 will also be made available.
It is worth noting that less than half of all data required for the final estimate is available at the time when the first preliminary estimate is published.
UK Labour market statistics for April to June will probably show continued employment growth. The published data will not reflect the consequences of the referendum, but employment growth will likely slow ahead. The right-hand chart below shows the difference in unemployment between domestic-born and the rate of unemployment for those born outside the EU 27.
UK finance minister George Osborne is planning to cut corporate tax to less than 15% to soothe looming Brexit concerns. He said he would no longer target a budget surplus in 2020 due to expectation of a slowdown in economic activities following Brexit.
We will pay close attention to BoE next week following Britain’s exit from the EU. Traders have largely priced in a rate cut after governor Mark Carney commented that additional stimulus is likely this summer, sending the sterling to fresh 31 year low. The current bank rate is 0.50% and assets purchase size at GBP 375 billion per annum.
Sources: Haendelsbank, TD Economics, BNP Paribas.
