| USA Nonfarm payrolls rose 187K in August, a bit more than the median economist forecast calling for a +170K print. However, this positive surprise was held back by a -110K cumulative revision to the previous month’s data. Employment in the goods sector advanced 36K as gains in construction (+22K) and manufacturing (+16K) were only partially offset by a 2K decline in the mining/logging sector. Jobs in services-producing industries, for their part, expanded 143K, with notable increases for health/social assistance (+97K), leisure/hospitality (+40K), professional/business services (+19K) and ‘’other’’ services (+13K). Alternatively, losses were observed in transportation/warehousing (-34K) and information (-15K). The temporary help services category (-19K), meanwhile, saw payrolls decrease for the ninth time in the past ten months. In all, 179K jobs were created in the private sector, compared with 8K in the public sector, the latter entirely due to federal (+10K) as state/local (-2K) administrations posted a decline. Average hourly earnings rose 4.3% in August, one tick lower than July and in-line with consensus expectations. MoM, earnings progressed below consensus at 0.2% Nonfarm payrolls came in just above consensus expectations in August, but the miss was actually larger when taking into account revisions to the previous months’ data. Indeed, the net change in payrolls for August including revisions was a meagre +77K. Still, after adding the fewest number of workers since the pandemic in June (+105K) and a slight improvement in July (+157K), the private sector did somewhat better in August, posting a 187K increase. But once again, employment gains were concentrated in just a few client facing industries; health/social assistance performed especially well. Elsewhere, gains were much more modest, as witnessed by the diffusion index which remained at 57.2%, one of the lowest prints recorded since the pandemic. The less volatile 6-month diffusion index remained at a post-pandemic low of 63.4% The household survey painted a similar picture of the situation prevailing in the labour market, with a reported 222K gain in employment. That said, the job increases in August, combined with a rise in the participation rate (62.8%), translated into a three-tick upswing of the unemployment rate to 3.8%. Full-time employment fell 85K, while the ranks of part-timers edged up 32K FOMC members may be already swayed by the household survey. The latter continued to show in August job losses for full-time employment while part-time edged up somewhat. Although employment remained positive, an increase in the participation rate brought the unemployment rate to its highest level in 18 months. Although an unemployment rate of 3.8% remains low on a historical basis, it could be the start of a less tight labour market. These figures also come in addition to a JOLTS report released earlier this week which showed the number of job openings falling to their lowest level in over two years. An also declining quit rate compounds that and demonstrates a certain lack of optimism for laborers. All told, the effect of tighter policy is establishing itself and will continue to do so in the next few months. Added to other headwinds, such as the resumption of student debt payments in October, this should push the U.S. economy into a technical recession late this year or in the first half of 2024 The second estimate of Q2 GDP growth came in at +2.1% in annualized terms, below both the advance estimate (+2.4%) and the median economist forecast (+2.4%). Household consumption was revised upward (from +1.6% QoQ annualized to +1.7%) exclusively on higher spending on services (from +2.1% to 2.2%), as expenditure on goods were unrevised (at +0.7%). Business investment in equipment (from +10.8% to +7.7%) and intellectual property (from +3.9% to +2.2%) were downgraded, while spending on structures (from +9.7% to +11.2%) was revised up. Residential investment (from -4.2% to -3.6%) was revised up as well. Final sales to domestic purchasers (i.e., household spending plus gross business investment), a good gauge of the underlying strength of an economy, grew 2.3% annualized in the quarter (mirroring the previous release). The contribution from inventories was revised downward, while the contribution from international trade remained essentially unchanged. On the inflation front, the 12-month change in the Personal Consumption Expenditures Price Index excluding food and energy was revised down a tick to 3.7% Nominal personal income increased 0.2% in July, a bit less than the median economist forecast calling for a 0.3% gain. Amid a labour market that remains healthy, the wage/salary component of income progressed 0.4%, while income derived from government transfers fell 0.6%. Personal current taxes, for their part, spiked 1.3%. All this translated into a flat reading for disposable income. Nominal personal spending, for its part, jumped 0.8% in the month, a tick more than consensus expectations. Adding to the positive surprise, the prior month’s print was revised upwards, from +0.5% to +0.6%. Outlays on services expanded 0.8%, while goods consumption progressed 0.7%. As disposable income stayed flat and spending advanced at a fast pace, the savings rate sank from 4.3% to an 8-month low of 3.5%. This remains significantly below the levels observed before the pandemic (between 8.5% and 9.0%) The headline PCE deflator came in at 3.3% YoY, up from 3.0% the prior month and in line with consensus expectations. The core PCE measure, for its part, edged up from 4.1% to 4.2%, a result that was also in line with the median economist forecast. On a monthly basis, both the headline and the core index advanced a consensus-matching 0.2% The Job Openings and Labor Turnover Survey (JOLTS) showed that the number of positions waiting to be filled fell from 9,165K in June (initially estimated at 9,582K) to a multi-month low of 8,827K in July. As this decrease was not offset by a drop in the number of persons looking for a job, the ratio of job offers to unemployed persons fell to its lowest point since September 2021 (1.5), but that remained well above this indicator’s pre-pandemic levels (≈1.20-1.25). The monthly decline was led by professional/business services (-198K), government (-155K), education/health services (-110K), and “other” services (-64K). Alternatively, job postings increased in the following categories: information (+101K), transportation (+75K), and leisure/hospitality (+62K) The Conference Board Consumer Confidence Index slumped from 114.0 in July to 106.1 in August. Longer-term expectations deteriorated substantially. The sub-index tracking sentiment towards the next six months fell 7.8 points to 80.2 as a larger proportion of respondents expressed negative opinions about future business conditions (from 14.5% to 16.8%) and less employment (from 15.6% to 18.0%). These darker prospects also translated into an increase in the ratio of people who expected to see their income decrease, from 9.9% to 12.4%. A similar amount of people were planning to buy a car in the next six months (from 11.7% to 11.5%), while a slightly larger percentage expected to spend on major appliances (from 44.6% to 45.2%). Sentiment towards home purchases stayed more or less unchanged (less one tick). Consumer inflation was expected to stand at 5.8% for the next 12 months, up from 5.7% the prior month which had been the lowest level since November 2020. Consumer assessment of the current situation worsened as well. The associated index fell from 153.0 to 144.8. The share of respondents who deemed jobs plentiful at present decreased from 43.7% to 40.3% The S&P CoreLogic Case-Shiller 20-City Home Price Index rose for the fourth consecutive month in June, climbing 0.9% MoM. Price increases were observed in all markets with the main gains stemming from San Diego (+1.46%), Seattle (+1.40%), New York (+1.27%) Boston (+1.05%), Cleveland (+0.93%) and San Francisco (+0.92%). YoY, prices were flat at the national level, marking an improvement after having registered the biggest decline since March 2012 in the prior month. Although demand remains relatively weak on the real estate market, very tight supply, combined with a strong labour market, is likely to continue to push prices upward in the coming months The ISM manufacturing PMI remained in contraction territory for a tenth consecutive month. At 47.6, the headline index came in above consensus expectations calling for a 47.0 print. Production (from 48.3 to 50.0) stabilized while new orders (from 47.3 to 46.8) continued to shrink at a stronger pace than in the prior month. Foreign demand (from 46.2 to 46.5) continued to be particularly weak, but the contraction slowed down slightly during the month. Amid weaker demand, U.S. factories continued to reduce their headcounts (from 44.4 to 48.5) but at a slowest pace than the previous month Construction spending advanced 0.7% in July after progressing an upwardly revised 0.6% the prior month (initially estimated at +0.5%). The monthly gain reflected increases in the private sector (+1.0%) as the public sector posted a decline (-0.4%). In the former, spending on residential projects rose 1.4%, while outlays on nonresidential structures progressed 0.5%. Following a decent handoff from the previous quarter, Q3 is set to rise following one month of data US Secretary of Commerce Gina Raimondo visited China this week, seeking to improve US-China trade relations. Raimondo warned Chinese officials that China could become uninvestable for US companies if the government continues unpredictable official behavior such as raids on firms and levying unexplained fines. Tensions between the two countries have been running high with Chinese officials expressing displeasure regarding US export controls on advanced semiconductors and other technologies. A working group was set up by the two countries to discuss export control measures to reduce misunderstanding of national security policies The US Department of Energy is making $12 billion in grants and loans available to automakers and their suppliers to retrofit plants to make electric vehicles. An additional $3.5 billion will be offered to domestic battery manufacturers, Secretary Jennifer Granholm announced Thursday US President Joe Biden proposed that salaried workers that make less than $55,000 a year be made eligible for overtime pay by default, extending eligibility to 3.6 million more workers, according to the US Department of Labor Hopeful signs on the inflation front helped the major benchmarks end with solid gains for the week, although stocks closed out their first negative month since February. A decrease in longer-term interest rates over much of the week provided a boost to growth shares in particular by reducing the implied discount on future earnings. Smaller-cap stocks outperformed, however, narrowing the significant year-to-date gap with large-caps. the week appeared to be one in which bad news for the economy was considered good news for stock prices, given the interest rate implications. On Tuesday, the S&P 500 Index recorded its best one-day gain since June, following news that job openings unexpectedly fell by 338,000 in July and hit their lowest level since March 2001. Job quits, considered by some to be a more reliable indicator of the strength of the labor market, also fell considerably In terms of data release, trade balance is out on Wednesday. The U.S. international trade deficit narrowed for the second consecutive month in June, as imports (-1.0%) fell more than exports (-0.1%). Weakening consumer demand for goods and a pullback in business inventory accumulation have weighed on imports. On the other side of the ledger, softening global growth has restrained exports. The trade deficit reversed course in July and widened to -$68.0B. Advance data on merchandise trade flows show goods imports (+1.9%) rising more than goods exports (+1.5%) during July. A surge in vehicle exports flattered the monthly outturn, which squares with data from the Federal Reserve Board showing total motor vehicle assemblies in July rising to its highest level since late 2018 ISM Services Index is also out on Wednesday. The service sector continues to grow, albeit at a decelerating pace. The ISM services index declined 1.2 points to 52.7 in July, remaining above the 50-breakeven level. The prices paid component jumped nearly three points to 56.8, the highest since April, while the employment gauge slipped over two points. These dynamics are broadly consistent with inflation data showing stickiness in services prices and the trend moderation in nonfarm payroll growth. UK Net mortgage approvals fell from 54,600 in June to 49,400 in July, registering at levels slightly below consensus. Mortgage approvals in July are around 25 percent lower than the pre-pandemic average, confirming a trend of approvals now seeming to be trending 20-25 percent below 2015-19 levels. It is notable that this roughly aligns with a recent projection by Zoopla that this year there will be a 28 percent drop in the number of sales to buyers who require a mortgage. Zoopla expects the number of cash buyers to remain roughly equal to levels last year. There has already been a correction in UK house prices, although the scale depends on what measure you look at. Land Registry data, which uses data from transactions, suggests a peak-to-trough fall of around 1.8 percent, while measures using mortgage approvals data imply a circa 4 percent drop, peak to trough. Mortgage approvals data is forward looking, this is more reflective of the current state of play, and given that mortgage approvals continue to be lackluster due to the interest rate environment, it looks like the correction in UK house prices has some way to go. The peak-to-trough fall in house prices could end up being in the region of 8 percent in nominal terms Consumer credit to individuals fell to GBP 1.2bn in July, from GBP 1.6bn in June and back roughly towards the trend observed in the two years prior to the pandemic. During July, households deposited a mere GBP 0.4bn with banks and building societies, a drop from GBP 3.8bn in the previous month and well below the pre-pandemic average. It is notable that in the month of May deposits actually saw a decline. July’s low figure for deposits and May’s negative print could be due to a variety of factors, including a reduction in net mortgage lending, investment into gilts (which have attractive returns currently) and possibly some consumers using savings to sustain their living standards. EU The flash estimate shows eurozone headline inflation at 5.3 percent in August, unchanged from July, while core inflation fell to 5.3 percent from 5.5 in July. The headline estimate was marginally higher than market expectations at 5.1 percent, while core inflation was in line with expectations (mean estimates according to Bloomberg yesterday). Among the four major eurozone economies, headline inflation was highest in Germany (6.4 percent), followed by France (5.7 percent), Italy (5.5 percent) and Spain, where the low headline measure (2.4 percent) masks high core inflation (6.1 percent). Among the core components in the euro area, goods inflation (excluding energy and food) continued its downward trend as the ripple effects of supply and demand mismatches are fading, but remains elevated at 4.8 percent (5,0 in July). Service inflation, with a closer link to labour costs than goods prices, remained high at 5.5 percent (5.6 in July) Despite eurozone inflation rising a faster-than-expected 5.3%, comments from the reliably hawkish Isabel Schnabel, a German member of the ECB executive council, sent the odds of an additional rate hike by the central bank sharply lower on Thursday. Schnabel said that recent economic developments “point to growth prospects being weaker than foreseen in the baseline scenario.” Markets took the remark as a sign that the ECB is near, if not already at the end, of its tightening cycle. ECB Vice President Luis de Guindos mirrored Schnabel’s comments, saying the ECB is in the final stretch of rate hikes and that data signal weaker activity in Q3 and perhaps into Q4 Consumer price inflation moderated in August to 6.1% year over year, matching a 14-month low hit in May. Meanwhile, retail sales fell in July by 0.8% sequentially, compared with the 0.5% decline expected by economists polled by FactSet In local currency terms, the pan-European STOXX Europe 600 Index ended 1.49% higher on hopes that interest rates would soon peak and that a recession, while possible, would likely prove to be shallow and short-lived. Stocks also appeared to receive a lift from China’s efforts to bolster its economy. CHINA Amid continued signs of slowing economic growth, Chinese authorities undertook a number of additional steps this week to shore up confidence, though the moves are seen as incremental and insufficient to turn the economic tide. Among the shifts made this week include the halving of a transaction tax levied on stock purchases, a lowering of reserve requirements, decreasing downpayment requirements on first- and second-time homebuyers and a cut to mortgage rates paid by existing first-time home buyers. In August, China’s manufacturing PMI rose to 49.7 from 49.3 in July but remained in contraction for a fifth straight month. The composite PMI edged up to 51.3 from 51.1 China’s central bank cut the amount of foreign currency deposits that domestic banks must hold as reserves. The reduction in the foreign exchange reserve requirement ratio from 6.0% to 4.0% effectively freed up more foreign currency in the local market to buy the renminbi currency, which fell to its lowest level since 2007 against the U.S. dollar in August. The central bank’s move came hours after China’s financial regulator said it would reduce minimum down payments for homebuyers nationwide and encouraged lenders to lower rates on existing mortgages Country Garden Holdings, formerly China’s largest developer by sales, revealed in a filing that it might default on its debt if its financial performance continued to deteriorate. Meanwhile, China Evergrande Group, another major developer that is already in default, unveiled more losses and postponed credit meetings that were supposed to start this week. The problems in the real estate sector have fueled worries about contagion to other parts of China’s financial system, including the loosely regulated trust industry While China’s economy has struggled to rebound from pandemic restrictions lifted in late 2022, recent stresses in the property sector and shadow banking system do not pose an immediate systemic risk as the government pursues its so-called common prosperity agenda. However, with China recording QoQ economic growth of just 0.8% as of June and recent trade activity coming off cyclical highs, the country is likely facing a period of below-trend growth. |
| Sources: T. Rowe Price, MFS Investments, Wells Fargo, National Bank of Canada, Handelsbanken Capital Markets, M. Cassar Derjavets. |
