| USA Nonfarm payrolls rose 187K in July, a bit less than the median economist forecast calling for a +200K print. This negative surprise was compounded by a -49K cumulative revision to the previous two months’ data. Employment in the goods sector advanced 18K as gains in construction (+19K) and mining/logging (+1K) were only partially offset by a 2K decline in the manufacturing sector. Jobs in services-producing industries, for their part, expanded 154K, with notable increases for health/social assistance (+87K), financial services (+19K), wholesale trade (+18K) and leisure/hospitality (+17K). Alternatively, losses were observed in information (-12K) and professional/business services (-8K). The temporary help services category (-22K), for its part, saw payrolls decrease for the eighth time in the past nine months. In all, 172K jobs were created in the private sector, compared with 15K in the public sector, the latter split evenly between federal (+7K) and state/local (+8K) administrations. Average hourly earnings rose 4.4% in July, the same as in June and two ticks higher than consensus expectations. MoM, earnings progressed a consensus-topping 0.4% Nonfarm payrolls came in just below consensus expectations in July but the miss was actually bigger when taking into account revisions to the previous months’ data. After adding the fewest number of workers since the pandemic in June (+128K), the private sector recovered somewhat in July, posting a 172K 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 demonstrated by a decline in the diffusion index from 58.8% to 57.2%, one of the lowest prints recorded since the pandemic. The less volatile 6-month diffusion index sank to a post-pandemic low of 63.4% Cyclical industries showed mixed results with manufacturing posting a third decline in five months and construction seeing payrolls expand at a decent clip. The divergence of these prints testifies to completely different outlooks in these two sectors. While American factories are bearing the brunt of a major drop in international demand for goods, the construction sector is benefiting from a supportive policy environment. Recall that the Infrastructure Investment and Jobs Act (IIJA), Inflation Reduction Act (IRA), and CHIPS Act each provided direct funding and tax incentives for public and private manufacturing construction. The result has been an explosion in spending in this sector which should continue to support construction employment going forward Several FOMC members are likely to argue in favour of maintaining rates at a high level for some time; some may also ask for more hikes. To defend their position, hawkish policymakers will surely point to the household survey, which showed healthier employment gains in July and a slight decline in the unemployment rate. But as positive as the household survey was, it still showed a few cracks. Most obvious to us was the fact that job gains were due entirely to part-time positions. Full-time jobs, on the other hand, fell at the fastest rate since 2012 if we exclude the early days of the pandemic The ISM manufacturing PMI remained in contraction territory for a ninth consecutive month. At 46.4, the headline index also came in below consensus expectations calling for a 46.8 print. Production (from 46.7 to 48.3) and new orders (from 45.6 to 47.3) continued to shrink, albeit to a lesser extent than in the prior month. Foreign demand (from 47.3 to 46.2) was particularly weak, with the associated index signaling the sharpest contraction this year. Amid weak demand, U.S. factories reduced their headcounts (from 48.1 to 44.4) at the steepest pace since the early days of the pandemic. Excluding the lockdown period, the decline in manufacturing employment was the largest since the Great Recession Signs of further supply chain improvements were clearly visible in the report with both input prices (from 41.8 to 42.6) and supplier delivery times (from 45.7 to 46.1) remaining comfortably below the 50-point mark separating expansion from contraction. This, combined with weaker demand conditions, allowed firms to catch up on unfilled orders, as evidenced by another sharp drop in work backlogs (from 38.7 to 42.8) The ISM Non-Manufacturing PMI came in at 52.7 in July, down from 53.9 the prior month and below the median economist forecast of 53.1. The new orders sub-index (from 55.5 to 55.0) and the business activity sub-index (from 59.2 to 57.1) signaled a deceleration in growth. The employment gauge (from 53.1 to 50.7) eased as well and was consistent with just a modest expansion in payrolls. Prices paid (from 54.1 to 56.8), meanwhile, increased at a faster pace than in the prior month, a development likely related to the increase in energy prices during the month. Of the 18 industries covered, 14 reported growth in July Construction spending advanced 0.5% in June after progressing an upwardly revised 1.1% the prior month (initially estimated at +0.9%). The monthly gain reflected increases in both the public sector (+0.3%) and the private sector (+0.5%). In the latter, spending on residential projects rose 0.9%, while outlays on nonresidential structures remained flat. In Q2 as a whole, private construction outlays were up 5.4% annualized as a 17.7% gain in the non-residential segment was only partially offset by a 3.2% decline in the residential sector The Job Openings and Labor Turnover Survey (JOLTS) showed that the number of positions waiting to be filled fell from 9,616K in May (initially estimated at 9,824K) to a 26-month low of 9,582K in June. As this decrease was more than offset by a drop in the number of persons looking for a job, the ratio of job offers to unemployed persons rose from 1.58 to 1.61, which remained well above this indicator’s pre-pandemic levels (≈1.20-1.25). The monthly decline was led by accommodation (-98K), transportation (-78K), retail trade (-36K), and manufacturing (-26K). Alternatively, job postings increased in the following categories: health care/social assistance (+136K), “other” services (+46K), and arts/entertainment (+17K) Nonfarm business productivity bounced back 3.7% annualized in Q2 as output grew (2.4%) in the face of reduced employee hours (-1.3%). The increase was significantly stronger than the median economist forecast (+2.2%) and hoisted productivity 1.3% above its level the year before. This print puts an end to a five-quarter negative streak Ratings agency Fitch downgraded the US sovereign credit rating one notch to AA+ from AAA citing expected fiscal deterioration over the next three years, a high and growing government debt burden and an erosion of governance manifested in repeated debt limit standoffs and last-minute budget resolutions over the last two decades. Tuesday’s move came a day after the US Treasury Department announced that it will borrow about $1.85 trillion in the second half of 2023, $1 trillion in the third quarter alone. While inflation has been slowing of late, investors are mindful of rising energy costs and US economic growth that has proven to be more resilient than expected — factors that could keep US Federal Reserve policy tighter for longer. The yield on the US 10-year note rose to its highest levels of the year on Friday, close to the 2022 high of 4.24%, before easing Just over 50% of respondents to the Fed’s Senior Loan Officer Opinion Survey said credit standards at US banks are tightening. Survey respondents reported tighter standards and weaker demand for commercial and industrial (C&I) loans to firms of all sizes during the second quarter. Banks also reported tighter standards and weaker demand for all commercial real estate (CRE) loan categories. So far, however, tight credit has not mapped into broad-based economic weakness as the economy proves more resilient than expected The major U.S. equity benchmarks started August with a down week after closing out a strong July. Stocks declined amid rising Treasury yields and an unexpected downgrade to the U.S. government’s credit rating. The technology-heavy Nasdaq Composite suffered the largest losses for the week. In a busy week for corporate earnings releases, investors were especially focused on results from mega-cap names Amazon and Apple, which reported earnings after markets closed on Thursday. Amazon significantly beat expectations, helped by strength in its core retail business, and the company’s stock rallied more than 9% at Friday’s open. Apple, meanwhile, traded down about 3% after a mixed report that showed strength in its services business, although iPhone sales disappointed In terms of data release, NFIB Small Business Optimism is out on Tuesday. Small business sentiment seems to be perking up despite ongoing trepidation about a potential recession. The NFIB Small Business Optimism Index shot up 1.6 points in June, the largest monthly upswing since August 2022. June revealed upturns in the share of owners expecting the economy to improve over the next six months and the share thinking that now is a good time to expand. These incremental improvements reflect a resilient economy that has not buckled under the headwinds of high inflation or interest rates. Instead, easing inflation over the past few months has become a new tailwind for consumers, and businesses seem to have found the confidence to invest despite higher financing costs. These developments suggest that the once-elusive path to soft landing may now be viable The CPI print is out on Thursday. Consumer price inflation is steadily moderating. Headline CPI rose just 3.0% year-over-year in June, the lowest annual rate since March 2021. A large portion of this downdraft can be attributed to slowing food inflation and an outright decline in energy prices relative to their highs in the summer of 2022. Core inflation has been a much tougher nut to crack, registering a firmer 4.8% annual rate. But even core CPI started to demonstrate some downward momentum in June, driven by softer goods prices and the ongoing disinflation from primary shelter. UK The Bank of England’s (BoE’s) Monetary Policy Committee (MPC) raised interest rates by 25bp to 5.25%, in line with consensus. The MPC voted in a three-way split, with one member voting for no rise (the dovish Dhingra), two members voted for 50bp (Mann and Haskell), and the majority voted for 25bp, including the newest MPC member Megan Greene (who has replaced the dovish Sylvia Tenreyro Through early to mid-July market consensus had been for UK interest rates to peak above 6% in this cycle, with some stressed scenarios seeing rates potentially rising to 7%. Economist forecasts have been generally more restrained and due to the most recent inflation figures (CPI inflation fell by more than expected from 8.7% to 7.9% in June, still well above its 2% target), market fears of more substantial hikes have eased. The BoE expects inflation to fall to 5% by year end, driven by lower energy and moderating food and goods costs, but services prices inflation is presently over 7% and is expected to remain elevated throughout the remainder of this year. Inflation is likely to continue to fall over the coming 12 months, but it will prove stickier than anticipated once it falls to around 3%, the result of this is that nominal interest rate will likely remain above 3% through to 2026 The UK housing market remained weak amid the highest mortgage rates since 2008. House prices fell 3.8% year over year in July, worse than June’s drop of 3.5% and the fastest decline since July 2009, according to a closely watched index published by the Nationwide Building Society. In addition, BoE mortgage data for the second quarter showed the first quarterly decline in the value of net mortgage lending since records began in 1987. EU Annual inflation in the euro area slowed further to 5.3% in July from 5.5% in June but remained well above the European Central Bank’s 2% target. Inflation also declined in Germany and France, the bloc’s two largest economies. Tthe eurozone economy expanded 0.3% sequentially in the second quarter, after gross domestic product (GDP) shrank or stagnated in the previous two quarters. Germany’s GDP was unchanged, while Italy’s economy contracted by 0.3%. Forward-looking purchasing managers’ surveys indicated a weaker start to the third quarter. The final reading of the composite index of business activity in services and manufacturing was revised slightly lower to 48.6 in July. For this indicator, readings below 50 signal contraction In local currency terms, the pan-European STOXX Europe 600 Index ended 2.44% lower. Higher U.S. bond yields and some disappointing European earnings reports deflated investor enthusiasm for riskier assets. Major country stock indexes also declined. Germany’s DAX dropped 3.14%, France’s CAC 40 Index lost 2.16%, and Italy’s FTSE MIB slid 3.10%. CHINA China’s official manufacturing Purchasing Managers’ Index (PMI) rose to 49.3 in July as expected, from June’s 49. However, it stayed below the 50-point threshold separating growth from contraction for the fourth consecutive month. The nonmanufacturing PMI declined to a weaker-than-expected 51.5 from 53.2 in June. Separately, the private Caixin/S&P Global survey of manufacturing activity eased to a below-forecast 49.2 in July from June’s 50.5 and marked a return to contraction after expanding for two months. Meanwhile, the Caixin survey of services activity unexpectedly rose for the seventh straight month as new business and operating conditions improved New home sales by China’s top 100 developers slumped 33.1% in July from a year earlier, extending declines for a second month. The latest data from the China Real Estate Information Corp. spelled more trouble for China’s developers despite efforts from the central and local governments to shore up the debt-laden property sector starting in December The People’s Bank of China (PBOC) pledged to support the development of China’s real estate market during its biannual work conference, which was chaired by the newly appointed governor, Pan Gongsheng. The PBOC said it would continue to reduce housing loan interest rates and down payment ratios and guide commercial lenders to adjust rates on existing mortgages. The PBOC’s pronouncements raised speculation that the central bank may cut the reserve requirement ratio for domestic lenders in the near term as the government ratchets up efforts to bolster China’s flagging recovery China’s cabinet, the State Council, announced new measures to revive consumption. The wide-ranging policies focused on removing restrictions on consumption in sectors including autos, real estate, and services, Reuters reported. Local regions were also encouraged to provide subsidies for home appliance purchases and home renovation materials in rural areas. However, the measures contained no mention of direct cash support to consumers to bolster spending, which some analysts have called for Chinese stocks rose as Beijing’s supportive stance offset concerns about the latest batch of disappointing economic data. The Shanghai Stock Exchange Index gained 0.37% while the blue-chip CSI 300 advanced 0.7%. |
| Sources: T. Rowe Price, MFS Investments, Wells Fargo, National Bank of Canada, Handelsbanken Capital Markets, M. Cassar Derjavets. |
