- Digesting encouraging Japan wages but poor Household Spending, better than
expected German Industrial production along with start of US/China Trade
war, focus on UK Q1 labour costs ahead of US & Canadian Jobs and Trade;
weekend UK Cabinet meeting on Brexit the other key event risk
- FOMC Minutes: few surprises, discussion on Yield Curve flattening worthy
of note, along with balanced view on economic outlook despite concerns
on risks from EM markets and trade tensions
- US Labour data: Earnings 'front and central', solid Payrolls gain seen,
Unemployment rate seen holding at cyclical low
- Canada labour data: Employment expected to post solid rebound, wages
seen remaining high, negative surprise need to shift expectations of
BoC rate hike next week
- BoC and Fed rate hike probabilities; US 2/10 yr yield spread; WTI Crude,
US Copper and Soybean futures
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** EVENTS PREVIEW **
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While the US labour report clearly dominates the schedule in data terms, and the overriding influence will be the US and Chinese deadline on trade tariff imposition, these are not the only items of note on the day's agenda. Statistically there are the key Japan wages and Household Spending data along with German and other Eurozone national Industrial Production to digest ahead of UK Q1 Labour Costs, while the US has its overall Trade data, as does Canada, which also publishes its labour market report. Eminently this is a moment of truth in terms of the various trade skirmishes, with a non-negligible risk of the situation spiralling out of control, and that also applies to this Saturday's meeting of the UK Cabinet to thrash (yet again!) it's negotiating position on the UK's future trade relationship with the EU, which to be frank should have been largely established when the Article 50 letter was written. As for the outbreak of the US/China trade war, the key aspect now is how quickly this escalates with Trump's rhetoric hardly suggesting any reason to assume that this may not spiral out of control very rapidly. Market reaction has been muted, indeed the rebound in China stocks probably owes more to the local 'plunge protection squad' trying to effect an end of week squeeze on shorts, while the better tone elsewhere is similarly a case of "sell the rumour, buy the fact" as positions are squared up ahead of the US labour data and the weekend, rather than being indicative of complete indifference to the escalating trade battles, and in no small part aloo predicated by the destruction of market liquidity (across sectors) due to regulation post GFC. The sharp outflows from all US equity funds, and indeed across all other major asset classes reported by Lipper yesterday are also worthy of note.
*** U.S.A. - June labour report **
- That the US labour report is not the influence on financial markets that it used to be should by now be abundantly clear, but its aura remains strong nevertheless, though the primary focal points will be the wages and un-/underemployment rates, rather than payrolls. Yesterday's marginal miss on the ADP Private Employment was neither here nor there in terms of today's report, with survey evidence such as the Consumer Confidence Labour Differential (25.1 vs. May's post GFC high of 26.5) and a 218K Initial Claims reading in payrolls survey week, effectively corroborating the as ever very agnostic consensus expectations of 195K headline and 190K for Private Payrolls. As for Average Hourly Earnings, these are expected to reprise the May outturn with a 0.3% m/m 2.8% y/y outturn, which would edge the 6-mth annualized rate down to 2.6% as December's 0.4% m/m increase falls out, though the salient points are that despite obvious skills shortages and a super low 3.8% Unemployment Rate (unchanged) nominal wage growth is not accelerating, and real wage growth is zero (May CPI 2.8% y/y, June CPI consensus 2.9% y/y). The Underemployment Rate requires close attention, having dropped from the very static readings around the end of 2017 and Jan/Feb 8.2% down to 7.6%, which implies that any remaining slack in the labour market is now being absorbed quite rapidly. There seems little doubt overall that one or other of the components will need to surprise in a significant way if today's report is not to be a footnote to the trade tensions narrative.
** Canada - June labour report **
- By contrast with the US, today's Canadian labour data could prove pivotal ahead of next week's BoC policy meeting (11th), with markets heavily discounting a rate hike (80.5% probability). The consensus implies that the surprise 7.5K headline drop in Employment in May (Full-time -31K) was an aberration, with headline seen at +20K and Full-time at +31K, and the Unemployment Rate to be unchanged for a fifth consecutive month at 5.8%. Rather more material will be the Wages element, which is seen dipping to 3.6% y/y from 3.8% - still very elevated, though this is in part predicated on favourable basic effects from a very sluggish H1 2017 pace when wage growth range from 0.5% to 1.0% y/y, which starts to unwind as we got through H2. Any miss relative to forecasts will need to be substantial to push sharply back on rate hike expectations, given recent data and the Fed's rate trajectory offer plenty of reason for the BoC to follow the Fed's June move with a 25 bps hike to 1.50%
** U.S.A. - June FOMC minutes **
- There were few real surprises in the minutes, though the following passages look to be worth noting, as ever remembering the order of importance as per 'all, most, many, some and several"
a) Risks to economic Outlook
"Participants commented on a number of risks and uncertainties associated with their outlook for economic activity, the labour market, and inflation over the medium term. Most participants noted that uncertainty and risks associated with trade policy had intensified and were concerned that such uncertainty and risks eventually could have negative effects on business sentiment and investment spending. Participants generally continued to see recent fiscal policy changes as supportive of economic growth over the next few years, and a few indicated that fiscal policy posed an upside risk. A few participants raised the concern that fiscal policy is not currently on a sustainable path. Many participants saw potential downside risks to economic growth and inflation associated with political and economic developments in Europe and some EMEs."
b) US Yield Curve
"Meeting participants also discussed the term structure of interest rates and what a flattening of the yield curve might signal about economic activity going forward. Participants pointed to a number of factors, other than the gradual rise of the federal funds rate, that could contribute to a reduction in the spread between long-term and short-term Treasury yields, including a reduction in investors' estimates of the longer-run neutral real interest rate; lower longer-term inflation expectations; or a lower level of term premiums in recent years relative to historical experience reflecting, in part, central bank asset purchases. Some participants noted that such factors might temper the reliability of the slope of the yield curve as an indicator of future economic activity; however, several others expressed doubt about whether such factors were distorting the information content of the yield curve. A number of participants thought it would be important to continue to monitor the slope of the yield curve, given the historical regularity that an inverted yield curve has indicated an increased risk of recession in the United States. Participants also discussed a staff presentation of an indicator of the likelihood of recession based on the spread between the current level of the federal funds rate and the expected federal funds rate several quarters ahead derived from futures market prices. The staff noted that this measure may be less affected by many of the factors that have contributed to the flattening of the yield curve, such as depressed term premiums at longer horizons. Several participants cautioned that yield curve movements should be interpreted within the broader context of financial conditions and the outlook, and would be only one among many considerations in forming an assessment of appropriate policy."
c) Policy outlook
"Participants offered their views about how much additional policy firming would likely be required to sustainably achieve the Committee's objectives of maximum employment and 2 percent inflation. Many noted that, if gradual increases in the target range for the federal funds rate continued, the federal funds rate could be at or above their estimates of its neutral level sometime next year. In that regard, participants discussed how the Committee's communications might evolve over coming meetings if the economy progressed about as anticipated; in particular, a number of them noted that it might soon be appropriate to modify the language in the post-meeting statement indicating that "the stance of monetary policy remains accommodative."
"Participants supported a plan to implement a technical adjustment to the IOER rate that would place it at a level 5 basis points below the top of the FOMC's target range for the federal funds rate. A few participants suggested that, before too long, the Committee might want to further discuss how it can implement monetary policy most effectively and efficiently when the quantity of reserve balances reaches a level appreciably below that seen recently."
"With regard to the post-meeting statement, members favoured the removal of the forward-guidance language stating that "the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run." Members noted that, al*though this forward-guidance language had been useful for communicating the expected path of the federal funds rate during the early stages of policy normalization, this language was no longer appropriate in light of the strong state of the economy and the current expected path for policy. Moreover, the removal of the forward-guidance language and other changes to the statement should streamline and facilitate the Committee's communications. Importantly, the changes were a reflection of the progress toward achieving the Committee's statutory goals and did not reflect a shift in the approach to policy going forward."
from Marc Ostwald