| USA Nonfarm payrolls rose 209K in June, less than the median economist forecast calling for a +230K print. This negative surprise was compounded by a -110K cumulative revision to the previous months’ data. Employment in the goods sector advanced 29K as gains in construction (+23K) and manufacturing (+7K) were only partially offset by a 1K decline in the mining/logging sector. Jobs in services-producing industries for their part, expanded 120K, with notable increases for health/social assistance (+65K), leisure/hospitality (+21K) and professional/business services (+21K). Alternatively, losses were observed in retail (-11K), transportation/warehousing (-7K) and wholesale (-4K). The temporary help services category (-13K), meanwhile, saw payrolls decrease for the sixth time in the past 8 months. In all, 149K jobs were created in the private sector, compared to 60K in the public sector, nearly all of these at the state/local level (+59K). Average hourly earnings rose 4.4% YoY in June, the same as in May and two ticks higher than consensus expectations. Month on month, earnings progressed a consensus-topping 0.4% The household survey painted a more upbeat picture of the situation prevailing in the labour market, with a reported 273K gain in employment. This gain still failed to completely erase the prior month’s drop (-310K). The jobs increase in June, combined with an unchanged participation rate (62.6%), translated into a one-tick decline of the unemployment rate to 3.6%. Part-time employment cooled 262K, while the ranks of full-timers surged 382K The two job reports sent what appeared at first like mixed messages, with the establishment survey coming in significantly weaker than expected and the household poll reporting strong gains. Over a longer period, however, they seemed much more in sync, with both surveys reporting about 1.7 million job gains year-to-date, a very impressive performance indeed. Nearly every important datapoint in the establishment survey were disappointing. Not only was the headline significantly below consensus expectations, but it was also accompanied by a massive downward revision to the prior months’ results. Job creation was also tilted towards the public sector, with private businesses adding the fewest number of workers since December 2020 This is likely to convince several FOMC members that more rate hikes are needed. To defend their point, hawkish policymakers will surely point to the household survey, which showed healthier employment gains in June. They might also highlight the fact that job creation has been tilted towards full-time positions recently. But as positive as the household survey was, it still contained a few dark points, such as the increase of the U-6 unemployment rate (which includes discouraged and underemployed workers) to a 10-month high and the rise in the number of persons working part-time for economic reasons to its highest level in more than a year. Optimists will surely note the increase in the prime-age (25-54 years old) participation rate to a 20-year high of 83.5% but this seemingly positive development might be hiding a more complicated reality. Almost all the increase in recent months can be explained by a surge in participation among prime age women to a new all-time high. More women participating in the labour market is good news but, in the absence of structural reforms to explain this phenomenon, this might in fact reflect a deterioration of American households’ finances. It is indeed possible that high inflation and rising interest rates has forced some women to look for a job to help their household pay the bills The ISM Manufacturing PMI slid from 46.9 in May to 46.0 in June, marking an eighth straight contraction in factory activity and the steepest since the early months of the pandemic. Output was in contraction territory for the sixth time in seven months, sliding back after visiting expansion the previous month (from 51.1 to 46.7). With weaker demand conditions, the employment gauge, too, returned to contraction territory (from 51.4 to 48.1) after expanding for two months. Signs of further supply chain improvements were clearly visible in the report. The input price tracker (from 44.2 to 41.8) fell for the seventh time in nine months, with survey respondents indicating “they are now in buyers’ market, as sellers are concerned about filling order books”. Supplier delivery times (from 43.5 to 45.7), for their part, continued to shorten. This, combined with weaker demand conditions, allowed firms to catch up on unfilled orders, as evidenced by the low level of the orders in backlog gauge (from 37.5 to 38.7). Of the 18 manufacturing industries surveyed, six reported growth in June. The ISM Non-Manufacturing PMI remained in expansion territory as it rose to 53.9 after sinking to 50.3 in May, its lowest level since December 2022. Growth in business activity (from 51.5 to 59.2), new orders (from 52.9 to 55.5), and new export orders (from 59.0 to 61.5) accelerated. Due to this increase in demand, the orders backlog contracted at a slower pace (from 40.9 to 43.9), while supplier delivery times decreased at a relatively constant pace (from 47.7 to 47.6). On the other hand, the employment sub-index returned into expansion territory (from 49.2 to 53.1). All this translated into a decline in the prices-paid sub-index, which nonetheless remained in expansion territory (from 56.2 to 54.1, a multi-month low). The Federal Reserve published the minutes of the June 13-14 FOMC meeting where policymakers kept rates unchanged for the first time since January 2022. Regarding the economy, participants deemed that there had been more resilience than expected earlier in the year. Nonetheless, there was a general agreement that growth would be subdued over the remainder of the year, as conditions continued to tighten. This included impacts from earlier banking sector stresses, even if the extent of this remained uncertain. While labour market conditions “remained very tight”, participants noted signs that supply and demand were balancing. “Some” pointed out that while payroll gains had been robust, other labour market measures suggested hiring might have been weaker. Meanwhile, participants agreed that inflation was declining more slowly than anticipated owing to stickier-than-expected core goods prices. There was a somewhat mixed outlook for housing services inflation, while “some” highlighted that core services inflation had shown “few signs of easing” lately. As for the decision to hold rates steady, “almost all” participants deemed it “acceptable or appropriate” to do so. Still, there were “some” who said that they favoured hiking by 25 basis points or that they would have supported such a proposal. Going forward, “almost all” agreed that more rate increases would be appropriate this year, with “many” thinking a further moderation in the pace of tightening would be appropriate. Overall, despite the unanimous decision, it seems that there is growing divergence within the FOMC. While (effectively) all participants believed that more rate increases were required, there were varying opinions on the amount and pace of additional tightening. This stemmed in large part from the uncertainty of monetary policy lags and the extent to which the full impact of earlier tightening has been realized Construction spending rose 0.9% in May after edging up 0.4% the prior month. The monthly gain reflected increased spending mostly in the private sector (+1.1%), but also to a lesser extent in the public sector (+0.1%). Within the former, outlays on non-residential structures decreased 0.3%, while spending on residential projects advanced 2.2%. Residential construction saw only its second rise in a year after outperforming during the pandemic. It is premature to call this gain the beginning of an upward trend, given the significant rise in mortgage interest rates and the slowdown in the home resale market. Despite this month’s negative print, nonresidential construction appears to have picked up the baton, advancing a whopping 10.3% in the past five months. Relative to their pre-crisis levels, private construction outlays in the residential and non-residential segments are now up 40.7% and 25.8%, respectively The trade deficit shrank from $74.4 billion in April to $69.0 billion in May. The goods trade deficit, for its part, decreased from $96.0 billion to $91.3 billion. The contraction was due to the fact that exports declined 1.5% (to $164.8 billion) while imports decreased 2.7% (to $256.1 billion) in the month. On the exports side, the main contributors to the decrease were soybeans (-$2.2 billion) and industrial supplies/materials (-$1.5 billion). On the imports side, the change was due to decreases in consumer goods (-$4.8 billion) and industrial supplies/materials (-$3.5 billion) Stocks closed lower in a generally quiet week. Growth stocks held up modestly better than value shares. Tesla, which has a heavy weighting in the Nasdaq Composite and growth indices, provided a boost after reporting better-than-expected sales, as did its smaller electric vehicle rival, Rivian. Conversely, disappointing trial results for AstraZeneca’s new lung cancer drug weighed on the health care sector. Markets closed early Monday and were shuttered Tuesday in observance of the Independence Day holiday$ In terms of data release, the consumer price index is out on Wednesday. Prices have materially eased in recent months. The CPI edged up 0.1% in May as energy prices retreated. Food inflation firmed but remained well below last year’s run rate. Excluding food and energy, the core CPI rose 0.4%, bringing the year-ago percent change to 5.3%. Core goods inflation was boosted by a heady gain in used vehicle prices, while core services continued to see a gradual deceleration in shelter prices The University of Michigan Consumer Sentiment is out on Friday. Consumer sentiment jumped last month. The headline index rose to 64.4 in June, up from 59.2 in May. Gauges for current (+4) and future (+6) conditions each notched higher, in a sign that consumers are broadly optimistic about the outlook. As price growth has cooled, consumers’ expectations for inflation in the short (one year ahead) and long term (5-10 years ahead) turned lower—a welcome sign for monetary policymakers at the Federal Reserve. UK Rising mortgage rates continued to take their toll on the UK housing market in June. House prices fell 2.6% year over year, according to home loan provider Halifax. This marked the largest such decline since 2011 British finance minister Jeremy Hunt will spell out on Monday long-awaited plans to encourage pension funds and other asset managers to invest in high-growth sectors, the Treasury said on Sunday. In Monday’s speech at the City of London’s Mansion House, Hunt will explain how the reforms could increase returns for pensioners and unlock capital for businesses, the Treasury said. The government – seeking to boost Britain’s slow economic growth without further increasing its hefty public debt – wants to persuade pension schemes to invest some of their funds in infrastructure as well as startups and green technology. EU German data for industrial production, factory orders, and exports pointed to continuing economic weakness in the second quarter. Output in May fell 0.2% versus April, disappointing consensus expectations that had called for industrial production to come in flat. New orders surged 6.4% in May on increased demand for ships, spacecraft, and military vehicles. However, on a three-month basis, this metric was still down 6.1% sequentially. Exports continued to be volatile, unexpectedly shrinking 0.1% month over month. Imports increased 1.7% in May Eurozone factory gate prices fell 1.9% sequentially in May, mainly due to a drop in energy costs, according to the European Union’s statistics office. Retail sales volumes in the eurozone were flat for a second month in May, as increased spending on non-food items offset declines for food and automotive fuel. On a year-over-year basis, retail sales fell 2.9%, marking an eighth consecutive monthly decline Consumer inflation expectations for the next 12 months moderated further in May, according to the European Central Bank’s (ECB’s) monthly survey. Survey participants see inflation at 3.9% in a year’s time, down from 4.1% in April. ECB President Christine Lagarde stuck to her hawkish stance, saying in an interview with a French regional newspaper that policymakers “still have work to do” to reduce inflation that is projected to be above the 2% target in 2024 and 2025 In local currency terms, the pan-European STOXX Europe 600 Index fell 3.09% on fears that central banks might need to keep tightening monetary policy. Investors were also disappointed by a lack of specific measures to bolster the Chinese economy despite more pledges of support from government officials. Major stock indexes declined. Germany’s DAX lost 3.37%, France’s CAC 40 Index slid 3.89%, and Italy’s FTSE MIB gave up 1.60%. CHINA In central bank news, China’s leadership appointed Pan Gongsheng, deputy governor of the People’s Bank of China, as the top Communist Party official at the central bank. The move positions Pan to be the central bank’s next governor, The Wall Street Journal reported, citing unnamed sources. Economists interpreted the move as reinforcing policy stability, consistent with the central bank’s current approach of modestly cutting interest rates and encouraging banks to lend more to targeted areas Premier Li Qiang, the country’s second-highest ranking official, pledged to “spare no time” in implementing a batch of targeted policies to strengthen China’s post-pandemic recovery. Li stated that China is at a critical stage of economic recovery and industrial upgrading and that comprehensive, well-coordinated measures are necessary to stabilize growth and employment, Bloomberg reported, citing state-run media. However, Li did not offer details on any specific measures The Caixin survey of services activity fell to a lower-than-expected 53.9 in June from 57.1 in May, its sixth successive monthly expansion but lowest reading since January. The weak Caixin data were in line with the official Manufacturing Purchasing Managers’ Index, which contracted in June for a third consecutive month The Financial Times reported this week that when China’s President Xi Jinping paid a state visit to Moscow in March he warned Russian President Vladimir Putin against using nuclear weapons in Ukraine, indicating that Beijing harbors concerns about Russia’s war even as it offers tacit backing, according to western and Chinese officials. Deterring Putin from using such weapons has been central to China’s campaign to repair damaged ties with Europe, according to the report Chinese equities retreated as the latest economic data raised concerns about the country’s sputtering post-pandemic recovery. The Shanghai Stock Exchange Index fell 0.17% while the blue-chip CSI 300 lost 0.44%. In Hong Kong, the benchmark Hang Seng Index plunged 2.91%. The private Caixin/S&P Global survey of manufacturing activity eased to 50.5 in June from May’s 50.9 as expansion of manufacturing output and new orders softened. Index readings above 50 indicate growth from the previous month, while those under 50 denote contraction. |
| Sources: T. Rowe Price, MFS Investments, Wells Fargo, National Bank of Canada, Handelsbanken Capital Markets, M. Cassar Derjavets. |
