Economic Outlook – 10 July 2022


• Nonfarm payrolls rose 372K in June, a lot more than the +265K pint expected by consensus. This positive surprise was partly offset by a 74K downward revision to the previous months’ results. Employment in the goods sector jumped 48K, with gains in manufacturing (+29K), construction (+13K) and, to a lesser, extent, mining/logging (+6K). Services producing industries, meanwhile, expanded payrolls by 333K, with notable increases for education/health (+96K), professional/business services (+74K), leisure/hospitality (+67K), transportation/warehousing (+36K) and information (+25K). Employment in the public sector edged down 9K. Average hourly earnings rose 5.1%oo in June, two ticks less than in May but still a tad stronger than the median economist forecast (+5.0%). Month on month, earnings progressed 0.3%

• The household survey painted a much less upbeat picture of the situation prevailing on the labour market, with a reported 315K drop in employment. When combined with a one tick decrease in the participation rate (to 62.3%), this decline left the unemployment rate unchanged at a post-pandemic low of 3.6%. Full-time employment retraced 152K, while the ranks of part-timers shrank 326K. The general mood in the markets was quite gloomy before the release of this week’s employment reports, the narrative having been dominated lately by talks of impending economic slowdown and the possibility of a recession. Data released should put some of these speculations to rest… but not all of them. That’s because the two employment reports conveyed starkly different messages. While the establishment survey signaled a continuation of strong employment gains, the household poll reported losses. Such discrepancies between the two reports are not particularly uncommon. These are, after all, rather imprecise indicators whose methodology differs greatly. The problem is that, even over a longer period, the two surveys appear out of tune. In fact, the household survey points to much weaker year-to-date employment gains (+1.72 million) than the establishment poll (+2.74 million)

• The Job Openings and Labor Turnover Survey (JOLTS) showed that positions waiting to be filled declined in May for a second month in a row, going from 11,681K to 11,254K. As a result, the ratio of job offers to unemployed person decreased from a near record level of 1.97 to 1.89, which remained extremely elevated on a historical basis. The report also showed that hires declined from 6,527K to 6,489K, a level still 7.7% above this indicator’s pre-pandemic peak. Total separations increased slightly from 5,965K to 5,983K as quits declined from 4,327K, to 4,270K. The quit rate (i.e., the number of voluntary separations as a percentage of total employment) decreased from 2.9% to 2.8% after remaining flat for the past three months. This level nevertheless remains high on a historical basis. The large number of quits is encouraging in that it may reflect growing confidence among employees and stiffer competition among employers

• The Institute for Supply Managements’ (ISM) readings for the manufacturing and services sectors both slipped modestly. However, both sectors remained above the 50 threshold, which suggests that both remained in expansionary territory. The underlying details paint a slightly more nuanced picture. Both sectors showed an increase in current business activity, but in the manufacturing sector, the new orders index slipped into contractionary territory, while in the services sector it eased but remained solidly expansionary

• The Fed will certainly welcome a slower pace of wage growth. The minutes for the June 14-15 FOMC meeting were released this week. The major takeaway from the minutes was that the meeting’s participants generally felt comfortable with the decision to raise the effective federal funds rate by 75 bps in order to tamp down mounting inflation. Aside from the above-consensus CPI inflation reading, an unexpected rise in measures of long-term inflation expectations gave several policymakers pause. Long-run inflation expectations becoming unmoored and drifting higher would make achieving a soft landing even more challenging. FOMC officials also noted that the risks to the inflation outlook were skewed to the upside. It is unclear to which extent FOMC participants might reassess that view based on more tepid wage growth and the downturn in commodity prices in recent weeks

• The Atlanta Fed’s GDP Nowcast is pointing to a second quarter of contraction in GDP in Q2. However, two quarters of contraction in GDP is not enough to qualify as a recession according to NBER criteria – the economic body that defines recessions. In addition to economic output, it places a heavy importance on payrolls employment and real personal incomes less transfers. The income measure has certainly softened with high inflation in recent months but remains in expansionary territory. And the impressive June payrolls report confirmed that employment remained strong. The unemployment rate remained low at 3.6%, and average hourly wages were up a healthy 5.1% YoY, both pointing to tight labor market conditions

• In May, the trade deficit narrowed from $86.7 billion (revised from $87.1 billion) to $85.5 billion. This was the smallest trade deficit since the beginning of the year. Goods imports were virtually unchanged (+0.1%) and stood at an elevated $284.2 billion, with gains in pharmaceutical preparations (+1.0 billion), crude oil (+$0.9 billion), other petroleum products (+0.8 billion), and organic chemicals (+0.8 billion) offset by declines in consumer goods (-1.5 billion). Goods exports rose 1.7% to a record high of $179.0 billion thanks to gains in crude oil (+$1.1 billion), pharmaceutical preparations (+$1.0 billion), nonmonetary gold (+$1.0 billion), and natural gas (+$0.9 billion) outweighing a drop in foods, feeds, and beverages (-$1.6 billion). With imports expanding at a lower rate than exports, the goods trade deficit shrank from $107.8 billion to $105.0 billion

• Stocks erased much of the previous week’s losses on optimism that the Federal Reserve will be able to curb inflation without tipping the economy into a recession. The gains pulled the S&P 500 Index out of bear market territory, leaving it down 19.1% from its January peak at the close of trading Friday. The large communication services, consumer discretionary, and information technology sectors performed best within the index. Energy shares fell sharply on Tuesday (markets were closed Monday in observance of Independence Day) as domestic oil prices fell back below USD 100 per barrel for the first time in nearly two months, but they rallied alongside crude prices later in the week

• In terms of data release, CPI is out on Wednesday. Consumer prices have marched decidedly higher throughout the pandemic, and the Consumer Price Index surprised to the upside in May, rising 1.0% during the month. That gain was enough to lift the year-ago rate of the index to a new high of 8.6% and fueled concerns over the persistence of price pressure. There has been little sign of a reprieve over the past month, and for June, a 1.1% monthly gain for the CPI is what is expected, which will push the year-ago pace of inflation to yet another fresh 40-year high of 8.8%. June could be the peak in the year-ago pace of inflation, but that will depend highly on how commodity prices play out over the next few months

• Retail sales is out on Friday. Goods demand largely pulled forward throughout the pandemic, and now with persistently higher prices, goods spending has started to roll over. Retail sales slid 0.3% in May, and once adjusting, the data for the jump in core goods consumer prices that month, the print may plunge a larger 1.6%. The data have shaped up a bit better for June. But price gains were again likely a key factor boosting these nominal sales estimates, as goods prices are expected to continue to rise, as detailed earlier. While inflation continues to cloud this nominal read on sales, the retail data remain an important indication of how goods spending is evolving


• Boris Johnson announced his intention to resign after more than 50 ministers and several Cabinet members stepped down in protest at his handling of a series of scandals that have rocked his administration. Despite calls for Johnson to step down, he said that he will remain as caretaker prime minister until the Conservatives choose a new party leader

• Bank of England regulators are concerned about an increase in the number of failed transactions in the British government bond repo market, which they said “reflected very poorly” on the City of London’s reputation. Gilt repos allow investors to temporarily exchange holdings of British government bonds for cash and are a key part of financial market plumbing, with an average of more than 500 billion pounds ($600 billion) of repos and reverse repos outstanding. The increased number of failed trades was the main topic at the BoE’s most recent money markets committee meeting with major banks, investors and clearing houses, minutes of which were published on Friday. “The Bank noted that it was unhappy to see the current level of fails, particularly in the repo market, and urged all market participants to work together to rectify this,” the minutes said. “In the Bank’s view it reflected very poorly on the efficiency of the London market although it was noted that fails were also currently a significant problem in many international markets,” the minutes added

• UK’s FTSE 100 inched up on Friday boosted by energy and consumer staple stocks at the end of a week marked by political turmoil in Britain, soaring energy prices in Europe and hawkish comments from major central banks. The blue-chip FTSE 100 (.FTSE) rose 0.1% after falling as much as 0.8%, while the domestically oriented FTSE midcap index (.FTMC) advanced 0.2%. Both the indexes still ended the week higher. Oil majors BP (BP.L) and Shell (SHEL.L) gained 0.3% and 0.5%, respectively, boosting the commodity-heavy FTSE 100, as crude prices climbed in volatile trade on concerns of supply tightness. Nevertheless, energy stocks (.FTNMX601010) were among the worst performers this week as crude prices declined on concerns over a potential recession-driven demand downturn. The pound reversed course and edged higher after falling as much as 0.9% an unfavorable macroeconomic backdrop overshadowed concerns about politics after Prime Minister Boris Johnson announced his resignation


• The ECB’s monetary policy statement laid down the foundations for its coming rate hiking cycle. It noted that it had updated its inflation projections, with numbers above the inflation target even in 2024 for both headline and core inflation. It stated that the conditions for raising rates have now been met, and even though key interest rates were left unchanged, the ECB said it would raise them “by 25 basis points” at its July meeting. It also indicated there would be a further hike at the September meeting, but left the magnitude unsaid. Specifically, it said that “the calibration of this rate increase will depend on the updated medium-term inflation outlook. If the medium-term inflation outlook persists or deteriorates, a larger increment will be appropriate at the September meeting.” Beyond September, the ECB foresees a “gradual but sustained path” of further increases in interest rates, where the pace will depend on incoming data and “how it assess inflation to develop in the medium term.” The ECB also decided to end net purchases of APP by July 1st 2022. Otherwise, the sections on APP, PEPP, and TLTROs were largely identical to the previous statement. The commitment to continue APP reinvestments “for as long as necessary to maintain ample liquidity conditions and an appropriate monetary policy stance” was noteworthy, as some expected the hawks to push this out of the text. But even though the possibility of a backstop QE facility to limit unwanted fragmentation in euro rates had been widely discussed ahead of the meeting, the statement included no information on this

• Germany’s trade balance showed a deficit of EUR 1 billion in May—the first since 1991—as exports fell unexpectedly, in part due to supply constraints. Imports, meanwhile, surged on higher prices for food, energy, and materials. German factory orders unexpectedly ticked up 0.1% after falling for three consecutive months. In addition, the magnitude of the month-over-month contraction in April’s factory orders was revised to -1.8% from -2.7%. However, industrial output rose sequentially by a smaller-than-expected 0.2% due to supply chain problems

• Shares in Europe advanced in the first week of July after three consecutive months of losses. However, the gains appeared to be restrained by China’s reimposition of some restrictions designed to curb the spread of the coronavirus and worries that an energy shortage might cause a recession in Europe. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 2.45% higher. Germany’s Xetra DAX Index rose 1.58%, France’s CAC 40 Index gained 1.72%, and Italy’s FTSE MIB Index added 1.96%


• The Caixin/Markit services PMI for China jumped back into expansion territory in June, moving from 41.4 to 54.5 amid the lifting of most COVID-19 lockdowns. With demand improving, the new business sub-index expanded at a contained pace, which was still the highest so far this year. Employment, however, did not keep up with the improvement in overall business conditions and recorded a slight contraction as firms were cautious in their spending in the face of persistent cost pressures. Indeed, for the 24th consecutive month, cost pressures remained in expansion, though they sagged to their lowest level since June 2020. Finally, business expectations regarding future output remained unchanged from May’s relatively strong print, though it was still below the historical average for this indicator. This figure belies a wide diversity in business confidence: “While some firms cited forecasts of a sustained post-pandemic recovery, others expressed concerns over any lingering impacts of the pandemic on their operations and customer demand.”

• China’s Ministry of Finance is considering allowing local governments to sell CNY 1.5 trillion (USD 220 billion) of special bonds in the second half of this year to boost infrastructure funding, Bloomberg reported. Reuters reported that China will set up a state infrastructure investment fund worth CNY 500 billion (USD 74.69 billion) to spur infrastructure spending and support the economy. Beijing appears to be trying to ensure that any momentum in infrastructure spending is sustained through the year’s second half and into early 2023. However, such a move would theoretically pull forward infrastructure spending from the second half of 2023 to the coming months. It also shows the government’s reluctance to expand overall fiscal stimulus spending

• Chinese stocks eased as rising coronavirus cases and elevated geopolitical tensions hurt sentiment. Both the broad, capitalization-weighted Shanghai Composite Index and the blue chip CSI 300 Index, which tracks the largest listed companies in Shanghai and Shenzhen, fell around 1%, Reuters reported

Sources: T. Rowe Price, MFS Investment Management, Wells Fargo, Handelsbanken Capital Markets, Reuters, TD Economics, M. Cassar Derjavets