Economic Outlook – 12 June 2016


The Job Openings and Labor Turnover Survey indicated that US job openings rose to match an all-time high in April. Turnover eased slightly, although hiring also fell. This is evidence of a tighter labor market and job gains are likely to be more modest moving forward.

Revised data showed that US productivity fell by less than originally estimated. This decline may be temporary, as weak first quarter growth was accompanied by strong payrolls. However, productivity should rebound, as the second quarter is expected to have stronger GDP growth and weaker payroll growth.

The market is currently pricing in zero odds of a June 15 rate hike, and the expectation is for the FOMC to live up to these expectations. More important will be how the parade of pronouncements (press release, summary of economic projections and press conference) portray the prospects for a rate hike in the coming months.

The key culprits for the Chair’s change of heart (if, in fact, there was one) were labour market developments. Although Ms. Yellen cautioned that, “one should never attach too much significance to any single monthly report”; there’s more than one dismal print happening here. The pace of labour market improvement has slowed noticeably. Payroll growth averaged only 80k in April-May. The major multi-month trends ending in March were all at least 110k above this level.


UK Industrial and manufacturing production increased more than expected in April. Total production output increased by 1.6% compared with April last year. All four main sectors showed increases, with the largest contribution coming from manufacturing, the largest component of production. The greatest contribution to the increase in manufacturing came from the manufacture of basic pharmaceutical products and pharmaceutical preparations, which increased by 12.5%, the highest rise since April 2009.

The UK’s deficit on trade in goods and services was estimated to have narrowed in April from March. Exports and imports both increased and the narrowing of the deficit reflects a greater in-crease in exports than imports. The deficit on trade in goods narrowed due to an increase in exports and an increase in imports. In 2015, exports of goods and services to the EU accounted for 44% of total exports. The proportion is closer to half for exports of goods (47%) and just under two fifths (39%) for trade in services.

As Britain’s EU referendum draws nearer, nerves are stretched ever tighter on the foreign exchange market. Apart from the impact on sterling and the euro, the safe-haven Swiss franc is increasingly the centre of attention. However, in the event of Brexit, the Swiss National Bank is likely to cushion unwelcome exchange rate movements.


In the euro area, the employment data for Q1 16 is due for release on Tuesday. Strong employment growth is expected in Q1, in line with the solid GDP growth in Q1. Looking forward, the expectation is for a robust employment growth to continue throughout 2016 following the trend in 2015, when employment growth showed strength despite moderate GDP growth. Strong employment growth despite modest GDP growth reflects the low potential growth. Productivity is still significantly below the pre-crisis level and the shrinking labour force is among the constraining factors for potential growth.

In relation to the employment numbers, labour costs data are due on Friday. The expectation is for slightly weaker labour costs growth compared with the 1.3% year-on-year increase in Q4 15, despite the improving labour market indicators. Labour market slack is likely to constrain wage pressure in the short term. Currently, slack in the labour market is observed as a low participation rate among prime age males and a high share of involuntary part-time employment.


China’s FX reserves dropped to below USD3.2 trillion in May 2016, versus its peak level of almost USD4 trillion in mid-2014. For this month specifically, the decline is largely due to unfavourable valuation effects. In general, it seems that the capital outflows from China are easing. Nonetheless, China still wants to see a “managed depreciation” in the CNY exchange rate.


All eyes will be on the Bank of Japan’s (BoJ) monetary policy announcement on 16 June. A move at the 28/29 July meeting is more likely than in June and we still expect the BoJ to cut its policy rate by 20bp to -0.3% and to announce additional qualitative measures in July, when the BoJ is due to update its CPI and GDP forecast. Economic activity in Q1 proved to be much stronger than initially expected and GDP was actually revised even higher this week (from 0.4% quarter-on-quarter to 0.5% quarter-on-quarter for Q1). This should take some of the immediate pressure of the BoJ.


Sources: Danske Bank, BMO Capital, Commerzbank, Haendelsbank, Wells Fargo.