The Global Markets Weekly – 10/2/15

Posted October 5, 2015 by rvillareal

Coulda, Woulda, Shoulda?[private]

The jobs report was in a word lousy, with every major facet weak.  The headline gain of 142K jobs was well below 200K expectations and the weakest since March.  Moreover, with revisions were decidedly negative in August, pulling an already disappointing 173K gain to only 136K.  And revisions to August were generally supposed to be up not down.  Now the expansion slowed for not one but two months.

The workweek and factory overtime also declined, so that total hours worked, a good proxy for labor input in September, actually declined.  The robust 0.4% increase in August has been reduced to a paltry 0.1%.  Average hourly earnings were unchanged so that the year-ago increase remains stuck at 2.2%  Finally, the unemployment rate, steady at 5.1%, hid the fact that both employment and the labor force fell.  So stability in the unemployment rate was a sign of weakness not strength.

With three months under our belt, the implication from the labor market is that GDP growth may have a hard time reaching 2%.  Unfortunately this is finally in keeping with the fragmentary inventory data.  As we have discussed in earlier weeklies, if business inventories increased in August and September at the slow July pace of 0.1%, two percentage points would be knocked off Q3 GDP.  So even if final demand growth remains a solid 2 1/2 to 3%, headline GDP growth might be only 1%.

This report then takes an October rate hike virtually off the table and we agree with the markets in putting only a 1-in-3 chance of a December rate hike.  Even that probability may be high if the government is shutdown on the day the FOMC meets.  Only time will tell if Yellen’s delay was one of the smartest moves in FOMC history or one of the dumbest.

• U.S.:  A widening trade gap (Tu) will confirm that the expansion will struggle to obtain a 2% Q3 GDP growth rate.   While the September FOMC minutes follow (Th), investors will be more interested in what a number of FOMC speakers think about the latest data than how close they game to hiking last month.
• Eurozone: Retail Sales data (Mon) may show more strength, thereby suggesting the no deflation psyche despite the fresh fall in HICP inflation.  In addition, and highlighting both the domestic demand revival and the fact that a fall in HICP inflation is not indicative of price trends generally, Q2 Eurozone House Price data (Thu) should show clearer signs of a pick-up having emerged.
• UK: No-one expects the BoE to alter course when it gives its next policy verdict on Thursday. But, amidst one formal dissent and clear hawkish hints from several other members, markets are much more alert to the BoE backdrop.  Indeed, the Monetary Policy Summary may be all the more interesting as it is unlikely to reflect the worries about EMG risks that the ECB has pointed to, despite the UK having a similar, if not greater, exposure to China!
• Japan:  The BOJ meets nex week (Tu/Wed).  While an easing move is expected, it may not come then..  .
• Other central banks:  In Australia, the RBA Decision (Tue) will leave the base lending rate unchanged at the record-low of 2.0%.  The RBA has maintained the rate since the unexpected cut in May, and with the dampening of the recent financial market turmoil another stable decision is expected this time.

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