| USA Nonfarm payrolls rose 114K in July, a long shot below the 175K Bloomberg consensus forecast and even further below a revised 179K increase in June. This downside surprise came alongside a 29K cumulative downwards revision to the prior two months. Goods sector employment rose 25K while service-producing industries grew by 72K. Of the headline job growth, 97K jobs were created in the private sector while employment in the public sector grew by 17K. To put it bluntly, this morning’s data was terrible for those in the ‘soft landing’ camp. A miss on headline job creation and the fourth straight higher-than-expected print on the jobless rate offers more evidence that the Fed’s assessment of a strong labour market is misguided. The ISM Manufacturing PMI slid to a YTD low of 46.8 in July, sinking past all economist estimates (median 48.8). The index remained below the 50-point mark (i.e., the mark that separates expansion from contraction) for the 20th time in 21 months. Weaker demand conditions were reflected in a low work backlogs reading (41.7, unchanged from the June), which can explain why firms shrank payrolls (down to 43.4 form 49.3). The JOLTS (Job Openings and Labor Turnover Survey) showed that there were 8,184K positions to be filled in June, down from 8,230K in May (revised up from 8,140K). This was still an upside surprise from the consensus forecast (8,000K). The labour market has shown significant tightening progress as measured by the JOLTS index, which has declined considerably since late-2021 and has neared pre-pandemic levels in recent months. The June reading is the second-lowest since February 2021. The Conference Board Consumer Confidence Index rose to 100.3 in July from 97.8 in June (revised down from 100.4). This is more than half a point above the consensus forecast calling for a 99.7 print. Despite the rise, the index has maintained a downward trend since mid- 2021, falling to well below the series’ pre-pandemic level. Consumer assessment of the present situation declined, with this sub-index slipping from 135.3 to 133.6. The Fed left its policy rate unchanged at 5.25% to 5.5% range, for the eight straight time; that means a full year. But there where incremental steps toward a first rate cut. At the press conference, Fed Chair Jerome Powell revealed that the FOMC had actually held “a nice conversation” about the potential case to cut rates. But in the end all 19 participants (not only the voting members) supported the decision for an unchanged policy rate. A rate cut “could be on the table as soon as the next meeting in September”, said Powell. No rate-cutting promises were made, of course, and the FOMC’s decisions are data dependent. And it is not about just any one data point, the test will be based the totality of the data. The Case-Shiller US National Home Price Index rose 5.9% year over year in May. In June, pending home sales fell 7.8% year over year but rose 4.8% from the month before. The major benchmarks closed lower, as investors reacted to the busiest week of the quarterly earnings reporting season and arguably the most important week of monthly economic data. The recent rotation toward value stocks and small-caps stalled, at least in part, as the small-cap Russell 2000 Index pulled back sharply at the end of the week. Notably, however, an equal-weighted version of the large-cap S&P 500 Index held up better than its more familiar, market-weighted counterpart, suggesting that the market’s performance continued to broaden away from the so-called Magnificent Seven and other technology-oriented market giants. Relatedly, the Nasdaq Composite pulled back over 10% from its July high, putting it in a technical correction. Companies representing nearly 40% of the S&P 500’s market capitalisation reported second-quarter earnings during the week, including four of the Magnificent Seven (Microsoft, Meta Platforms (Facebook), Apple, and Amazon.com). While results varied relative to consensus expectations, a common theme appeared to be expectations for heavy capital spending to build out artificial intelligence (AI) capabilities. The ISM Services Index has been volatile. In June, the index slipped into contraction territory for the second time this year. The index may break back into expansion territory with a reading of 51.4 in July, but the bounciness is illustrative of a sector that has lost its momentum and may be feeling the weight of more restrictive policy. Service providers have contended with elevated input costs and uncertain demand for the better part of the past year. While the prices paid sub-component has edged closer to its historical norm, production has been particularly weak. The business activity sub-component plunged nearly 12 percentage points in June, while the new orders gauge slipped seven percentage points. The weakening in activity is underpinned by sluggish retail sales, declining construction spending and challenging supply chain conditions with the ongoing conflict in the Red Sea. UK After rates being held at 5.25% for around a year the BoE have decided to cut interest rates by 25 basis points down to 5%, marking the potential start of an interest rate cutting cycle. The vote by the MPC to cut rates was by the finest of possible margins, with five members backing a 25bp drop and the remaining four members arguing for a freeze in rates. Andrew Bailey, the Governor of the BoE, had the deciding vote. Given how close the vote was, unsurprisingly the BoE has communicated that this does not indicate that the battle against inflation has been won yet. The minutes make clear that monetary policy needs to remain restrictive for sufficiently long to ensure inflation remains at 2% in the medium term, and that this reduction in Bank Rate is only slightly reducing the Bank’s policy restrictiveness. Chancellor Rachael Reeves gave her assessment of the UK’s fiscal situation: she did not paint a pretty picture. The Chancellor set out that she was struggling with the worst inheritance since WWII, based on the fact that taxes were at a 70 year high and debt was equal to the annual GDP. In addition, the Chancellor set out her argument that some £22 billion in spending was not budgeted for in any way (FYI, total Government spending in 2022/23 was £1.15 trillion). In contrast, the Conservatives pointed out that Labour’s inheritance was nothing like as dire as they supposed, the economy was growing faster than most industrial countries, inflation tamed and unemployment was low. In answering questions, the Chancellor hinted that Non-Doms will be asked to pay more tax, while there is no intention to levy a wealth tax. EU An initial estimate showed that annual inflation in the eurozone picked up to 2.6% in July from the 2.5% registered in June. A consensus estimate had called for inflation to decelerate to 2.4%. Nevertheless, services inflation eased for the first time in three months. Year-over-year changes in consumer prices varied across countries, with inflation easing in Spain but rising faster in Germany, France, and Italy. The region’s economy in the second quarter expanded a faster-than-expected 0.3% sequentially (0.6% on a year-over-year basis), led by growth in France, Italy, and Spain. However, Germany’s economy contracted, counter to expectations. Meanwhile, the unemployment rate ticked up to 6.5% in June from an all-time low of 6.4% in May. Still, the European Commission’s consumer confidence indicator for the euro area increased in July and has improved steadily since February amid optimism that borrowing costs would decline. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 2.92% lower as global markets were roiled by weak US economic data that sparked worries about growth. Major stock indexes also fell. Germany’s DAX tumbled 4.11%, France’s CAC 40 Index dropped 3.54%, and Italy’s FTSE MIB lost 5.30%. CHINA Profits at industrial firms rose by 3.6% in June from a year ago, up from a 0.7% gain in May, according to official data. Analysts said a steady recovery in top-line revenue amid stronger industrial production growth and slower producer price declines drove June’s rise. However, persistent weakness in domestic demand has raised speculation that Beijing will continue to roll out measures to shore up the economy as recent stimulus measures have done little to boost consumption. Efforts to stimulate China’s economy had been focused on increasing investment. However, a meeting of the Communist Party’s politburo turned its attention to increasing what it called “insufficient domestic demand.” A statement following the meeting gave no hint of new measures to boost consumption but emphasised the need to accelerate fiscal and monetary accommodation. Analysts remain concerned that China’s policymakers will continue a piecemeal approach to economic stimulus that has been criticised as too little too late. The official manufacturing Purchasing Managers’ Index (PMI) slipped to 49.4 in July from 49.5 in June, marking the third consecutive monthly contraction as production and new orders declined, according to the National Bureau of Statistics. The gauge remained below the 50-mark threshold separating growth from contraction. The Non-Manufacturing PMI, which measures construction and services activity, slipped to 50.2 from 50.5 in June, as expected. In a statement following the release, officials attributed the declines to seasonal factors and extreme weather events in some cities in China. Separately, the private Caixin/S&P Global survey of manufacturing activity unexpectedly contracted for the first time in nine months. The Caixin Manufacturing PMI, which polls smaller, export-oriented firms, fell to a weaker-than-expected 49.8 in July from June’s 51.8. Taken together, the various PMIs suggested that momentum in China’s export sector, one of the few bright spots in its economy, was slowing. Chinese equities were mixed after weak manufacturing data tempered investor sentiment. The Shanghai Composite Index gained 0.5% while the blue-chip CSI 300 lost 0.73%. In Hong Kong, the benchmark Hang Seng Index declined 0.45%. |
| Sources: T. Rowe Price, Wells Fargo, National Bank of Canada, MFS Investments, Handelsbanken, M. Cassar Derjavets. |
