There’s a frustration on the part of some market participants that there is always such a strong focus on the US employment report, given that the labour market is a lagging indicator of economic fortunes. Nevertheless, the fact that the labour market has been lagging the recovery of the past two years has been the primary issue, with total employment still way below the pre-recession peak of 2008 and the participation rate (those in work or looking) still on a declining trend.
For an economy that desperately needs tax revenues and consumers to spend (out of income, rather than borrowing), this has been a thorn in the side of the recovery to date. Furthermore, today’s anticipated 68k gain on headline payrolls falls far short of that required to account for the growth in the labour force. A negative headline number will once again increase speculation that the US economy is headed for another recession.
Guest post by FxPro
Commentary
Eurozone PMIs further fuelling the slowdown story. The final manufacturing PMI data for the eurozone was revised lower from the preliminary reading, taking the series down to 49.0, from 49.7 previously. Downward revisions of both Germany and Italy were primarily responsible, whilst the big stand-out is what we are seeing with export orders, with the German export orders balance the lowest in the eurozone. This comes on the back of the breakdown of Q2 German GDP data, which showed net exports subtracting 0.3% from headline growth. It’s a disquieting development, given that the German export sector has been one of the few bright spots on the eurozone economic front during the recovery phase. The manufacturing PMI series has declined every month since the first rate increase from the ECB back in April. At the time, Trichet commented that: “Euro area exports should be supported by the ongoing recovery in the world economy”, and also added that: “Recent economic data confirm that the underlying momentum of economic activity continues to be positive”. Both statements have been comprehensively overtaken by events and, whilst the expansion of liquidity provision and also the re-opening of the bond buying program have provided some offset, neither are strictly monetary policy tools. The case for an about-turn on ECB policy is growing, but Trichet is unlikely to be the man to deliver it with markets having to wait until his predecessor takes over (from November).
MOF spends big to prevent yen strength. Apparently the Japanese MOF’s determination to prevent the currency from strengthening much further is greater than many had expected. According to a statement released this week, the BOJ sold JPY 4.51trln (USD 59bln) in the forex market last month, by far the largest intervention for over seven years. Given the enormous size of this intervention, the question which begs to be answered is why the currency is not much weaker. USD/JPY for instance is not far away from its record low. Indeed, the MOF must be extremely frustrated by the lack of price response to its industrial-scale intervention. Its irritation is not dissimilar to that of the SNB, which also seems at a loss to counter the extraordinary strength of the Swiss franc. Such is the incredible volume of capital flows seeking safe havens that some central banks are essentially swimming against a financial rip-tide in attempting to thwart these massive shifts. For now, it seems an utterly fruitless exercise.
Diminished hope for a rate cut down under. After much excitement a couple of weeks ago that the RBA might actually cut rates before year-end, developments since then have effectively scuppered this prospect, at least for the near-term. Firstly there was last week’s parliamentary testimony from RBA Governor Glenn Stevens, during which he warned that inflation required careful watching. Secondly, data this week suggested the economy still has decent momentum; retail sales rose by 0.5% in July after a slight 0.1% decline in the previous month, while business investment rose by nearly 5% in the second quarter. The latter remains a real success story down under, with a very strong pipeline of capital expenditure, especially in the resource and energy sectors. Finally, the marginal lift in China’s PMI last month, together with the boost to stocks over recent days, has contributed to the Aussie’s improved tone. The RBA has left rates on hold at 4.75% since November last year.
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