Hope that the US economy was recovering after a spring lull has been scuppered by the news that non-farm payrolls rose by only 18K last month, well below expectations. There was also a cumulative downward revision to jobs growth in the two previous months by 44K. Looking at this report in detail, the jobs picture in the US is actually fairly dire. Public sector workers are still being laid off, with another 39K joining the ranks of the unemployed in June; since the end of last year, 188K government workers have been laid off.
Worryingly, the pace of job creation in the private sector has slowed to a crawl, up just 53K in the latest month. Even more depressing was the result of the household employment survey (conducted separately from the payrolls version) which calculated that employment collapsed by 445K last month, the largest monthly decline since the final month of 2009. As a result, the unemployment rate is now back up at 9.2% – back in March, it was 8.8%. It would have been much higher, were it not for a 272K decline in the civilian labour force. The number of unemployed has now risen for three consecutive months, by more than 500K, and aggregate hours dipped by 0.3%. In response, the dollar has fallen back sharply, the EUR has spiked back through 1.43, and treasury yields have declined significantly. For policy-makers, the implications of these numbers are significant. Firstly, Washington will need to go easy on excessive fiscal restraint lest it tips the economy back into recession – that said, there seems very little risk that the two parties could get anywhere near agreeing on proper fiscal austerity as things stand. Secondly, for the Fed, any notion it may have had that the size of their monstrous balance sheet could be normalised (reduced) any time soon can be put firmly on hold. The US economy is clearly still in intensive care.
Guest post by FXPro
EU (finally) discusses partial Greek default. Today’s emergency meeting of European leaders confirms that the sovereign debt crisis engulfing the Continent has now entered an even more dangerous phase with the contagion now posing a serious threat to Italy, the eurozone’s third-largest economy. ECB President Trichet, European Economic Commissioner Olli Rehn and Luxembourg Prime Minister Juncker will meet EU President van Rompuy and EC President Barroso for urgent discussions. Over the weekend, Die Welt claimed that the size of the EFSF may need to be doubled should Italy require a rescue. Eurozone finance officials are apparently having a rethink about the Greek burden-sharing plan, as they take heed of warnings from the ratings agencies that it could well trigger a default and as they recognise that the plan may not generate as large a contribution as had been hoped. Back on the table is the debt-swap plan which Germany first presented a few weeks back, which definitely would result in a partial default. Not surprisingly, the single currency has suffered, now just below the 1.42 level, against a backdrop of generalised risk aversion. Both cable and the Aussie were lower overnight, Asian bourses were down by around 1%, and the dollar registered a two-week high, despite Friday’s dreadful employment numbers.
Europe’s sovereign debt contagion continues to worsen. More suffering for investors in peripheral Eurozone bonds on Friday, with Italy and Spain the focus of attention. At one stage, the spread between Italian and German 10yr yields widened by a further 20bp to a new post-EMU record high of 240bp; just three months ago, this spread traded at 120bp. The Spain/Germany10yr bond spread widened a further 10bp on Friday to 275bp, up from 175bp three months ago. Belgian sovereigns are also attracting adverse attention, with the spread to Bunds out by another 10bp on Friday to 125bp.
Europe’s recovery looking less assured. Further evidence emerged on Friday suggesting that the pace of recovery in Europe is waning. In France, the business sentiment index produced by the BOF fell to 99 last month, from 103 previously. The French central bank suggested that industry had slowed markedly, and the services sector was also losing steam. In Italy, industrial production fell by 0.6% in May, below expectations. Earlier in the week, the various service sector PMIs for June were nearly all softer than the previous month. This follows the downward trend revealed by the various manufacturing PMIs.
The scourge that is UK inflation. The country is in the grips of unprecedented fiscal austerity, and the private sector is in recession, but unfortunately the scourge of inflation is still ever present. In the month of June, producer input prices rose another 0.4%, up an eye-watering 17% in the past year. Producers are having some limited success passing through these much higher input costs, with output prices up 5.7% in the year to June. To add to the misery of inflation, British Gas announced that it would be raising prices by a further 18% next month. The policy equation for the Bank remains incredibly tricky – how do you set interest rates when the private sector is in hibernation and inflation is well above your target? Staying on the current course is probably the best option, for now.