There was plenty to like in Friday’s February employment figures out of the US: 1) Private payrolls rose by 222K in the month, almost exactly matching the ADP outcome and consistent with the monthly growth regularly seen through 2006 and 2007 before the GFC; 2) The unemployment rate fell another notch, to 8.9%, down from 9.8% in November; 3) The diffusion index for industries showing job gains was the highest since 1988, which suggests that jobs growth is broadly based.
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However, although the labour market is getting better, it is still beset by huge problems. For instance, the participation rate continues to decline, now 64.2%, down from a recent peak of 66.4% in early 2007. To put this into context, the significant drop in the unemployment rate over recent months from 9.8% to 8.9% currently is almost exclusively the result of previously unemployed people dropping out of the labour force, rather than people finding work. Since September, employment is up less than 200K, whereas the number of unemployed has dropped by nearly 1.1m, principally because there has been a 1.4m surge in the number of those leaving the labour force. In the last three years, the number of people leaving the labour force is a staggering 7m. Right now in America, 140m people have a job out of a total population of 310m. In other words, only 45% of the population have a job. Little wonder that the US is in decline.
Commentary
Rising rates in Europe. After the ECB’s very clear message on monetary policy over the past couple of weeks, it is hardly surprising that yields are at their highest levels for some considerable time. For instance, the German 2-yr Bund yield rose to 1.84% on Friday, the highest level since late 2008, while the Greek 2yr yield jumped a further 40bp to a staggering 15.4%. Portuguese yields are still uncomfortably high – the 10yr yield touched 7.52% on Thursday, not far from the record high of 7.64% registered back on February 10th. In early trading today, the Irish 10yr yield has reached a record high of 9.48%.
Euro still climbing the wall of worry. With Trichet’s trigger finger apparently poised over the rate tightening button and core Europe continuing to register very respectable growth, the euro bears have been well and truly forced into hibernation recently. The EUR is now just a stone’s throw away from last November’s high at 1.4260; just two months ago when it was under 1.30, it seemed poised for a retest of last summer’s lows. The price action has been impressive. The bulls are now very much in command. However, it remains to be seen if the euro can sustain these lofty levels over coming weeks. Firstly, the front end of the yield curve has now fully priced-in two rate hikes of 25bp each from the ECB over coming months, an assumption that could easily be challenged in the period ahead.
Secondly, the US economy is looking decidedly better these days, with growth improving and the threat of deflation diminishing. Recently, a number of Fed officials have intimated that the recovery seems sufficiently robust to cease quantitative easing when the current program of Treasury purchases expires in June. At the point when the Fed’s commitment to an extended period of low interest rates looks untenable, the dollar is likely to benefit.
Thirdly, Europe still has a huge mess to sort out internally. Portuguese longer-dated yields are very close to recent record highs, and there is growing speculation that the country will require an international bail-out before too long. In addition, European policy officials are struggling to make much headway in terms of coming up with a more robust response to their debt crisis. Germany and other members of Europe’s AAA-club are understandably balking at various proposals from weaker members, such as broadening the remit of the EFSF, increasing its size, and/or reducing the interest rate on Ireland’s bailout package. At the same time, Germany was roundly condemned last month for its competitiveness pact, which will be discussed again at an EU summit on Friday.
European leaders have pledged to deliver a comprehensive package after the March 24-25 summit. We, like many others, are very sceptical that Europe can meet this timetable.
China more open to slow yuan appreciation. Chinese policy officials have been extremely reluctant to allow the yuan to appreciate over the past three years but, ever so gradually, their resistance is fading. Interestingly, this has virtually nothing to do with a sudden acceptance of the widespread international view that China’s exchange rate is fundamentally undervalued. Rather, it has been motivated by two very different calculations, that a slightly stronger currency can act as part of a counterweight to rising inflation pressures, and secondly that a slow appreciation is probably the price that needs to be paid for the greater internationalisation of the yuan.
Since June of last year, the yuan has appreciated slowly and consistently against the dollar, from 6.83 to a new 17-yr high of 6.5632, a gain of 4%. Last week the PBOC announced plans designed to broaden the usage if the yuan, including allowing exporters and importers to settle trade transactions in yuan and permitting greater foreign investment into the local debt and money market. Separately, the PBOC has lifted both reserve requirements and key interest rates on a number of occasions over recent months in order to combat rising inflation pressures and rampant liquidity growth.
In recent weeks, there have been some signs that these policy measures are bearing fruit, with consumer and manufacturing confidence dipping. Right now, investors have sufficient confidence that the Chinese authorities can cool the economy without tipping it into something more serious. Given the incredible pace of growth and the intense pressure on prices, there must be serious doubts that the PBOC can achieve such a soft landing.
Looking Ahead
Monday: US: Consumer Credit, January (expect $4.7bn, previous $6.1bn).
Tuesday: UK: RICS house price survey, February (expect -33%, previous -31%); BRC Sales, February; FR: BOF Business Sentiment survey, February (previous 110); Trade balance, January (previous -€5.1bn); GER: Factory Orders, January (expect 2.5% MoM and 15.5% YoY, previous -3.4% and 19.7%); US: NFIB Small Business Optimism, February (previous 94.1); IBD/TIPP Economic Optimism, March (previous 94.1).
Wednesday: UK: Trade balance, January (previous – £4.83bn); GER: Industrial Production, January (expect 1.5% MoM and 11.1% YoY, previous -1.5% and 10.0%); US: MBA Mortgage Applications; Wholesale Inventories, January (expect 1.0% MoM, previous 1.0%).
Thursday: FR: Industrial Production, January (previous 0.3% MoM and 7.0% YoY); GER: Trade balance, January (previous €11.9bn); EC: ECB Monthly Report; IT: Industrial Production, January (previous 0.3% MoM and 5.4% YoY); UK: Industrial Production, January (previous 0.5% MoM and 3.6% YoY); MPC meeting (expect rates on hold at 0.5%); US: Initial Jobless Claims (previous 368K); Trade balance, January (expect -$41bn, previous -$40.6bn); Bloomberg Consumer Comfort; Monthly Budget Statement, February (expect -$235bn).
Friday: UK: NIESR GDP estimate, February (expect 0.5%); PPI Output Prices, February (previous 1.0% MoM and 4.8% YoY); GER: CPI, February f (expect 0.5% MoM and 2.2% YoY); CAN: Net change in employment, February (previous 69.2K); US: Retail Sales, February (expect 0.6%, previous 0.3%); Business Inventories, January (expect 0.7%, previous 0.8%).
Source: Bloomberg
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