The Global Markets weekly – 6/13/16

Posted June 13, 2016 by rvillareal

Is Slower U.S. Job Growth A Bad Thing?[private]

The disappointing jobs report followed by cautious comments by Fed chairman Yellen has brought investors around full circle regarding the timing of the Fed’s next move.  DE puts the chances of a move next week around 15%, higher than what the market thinks, but still very unlikely.  Remember that just two weeks ago, the market probability was close to 40% and four weeks ago the probability was closer to 10%.  So market expectations have been on quite a roller coaster ride.

Sadly, Fed policy appears to have come full circle as well.  If the Fed does not act next week, we will be sure that the Fed’s “data-dependency” really means that the Fed has become a “prisoner of last month’s jobs report,” an outcome the Fed worried about 30 years ago.  Investors are lucky in a way that the last jobs print was 38K rather than 138K, a reading would have made handicapping a rate hike next week much harder.  A lukewarm jobs report in May would have increased the chances of a Fed surprise, since the latest report might not be considered “that” concerning by the FOMC.

The Fed is effectively saying that slower job growth is a bad thing when it might be a good thing, if we are close to full employment.  As we pointed out in April, a softening jobs trend is more likely than not to be permanent.  With labor force growth less than 1% currently, only 100,000 jobs are needed to be created to keep the jobless rate stable if the economy is near full employment.   With interest rates close to zero, the Fed is understandably more conscious of the downside risks, worried that slower job growth is a “harbinger of a persistent slowdown in the broader economy.”

Still a good start to consumer spending in Q2 suggests a 2% gain in GDP likely.  With even a moderate bounce in hiring in June to above 150K, the chances of a July rate hike are still greater than 50%.  A smaller rebound might mean a delay to September, assuming the FOMC is ready to accept the notion that hiring does not have to maintain a 200K pace of justify further rate hikes.  That acceptance may be slow in coming among the more dovish members of the FOMC, presenting the possibility of more heartburn for investors and analysts this summer, particularly if inflation continues to grind higher and downside risks appear less threatening.

• S.: The FOMC rate decision, projection materials, and press conference (Wed) are the 800-pound gorillas this week. The FOMC will try to orchestrate a momentary pause as it assesses incoming data without writing off potential action later in 2016. For example, announcing that for the “near future” all meetings would be followed by press conferences would increase the market’s perception that July was “live.”  The data slate is heavy with retail sales (Mon), industrial production (Wed), consumer prices (Thu), and housing starts (Fri).
• Eurozone: The coming week may bring an array of data providing yet further evidence that the ECB is still too gloomy about the economic backdrop and outlook. The ECB Bulletin (Thu) may underscore the ECB’s caution. Employment data for Q1 (Tue) may continue this pick-up. Indeed, Y/Y jobs growth may improve further above the 1.2% seen at the end of 2015. If so, this would suggest that the ECB employment projections are too cautious as well!
• UK: As has been the case for quite some time, no-one expects the BoE to alter policy when it gives its next policy verdict on Thursday. Even so, the minutes to the meeting and (perhaps more crucially) the Monetary Policy Summary will get their usual clear scrutiny, the question being how the MPC will have reacted to the stronger real economy backdrop that has emerged of late, most notably in terms of industrial production numbers. It will be interesting to what extent the minutes see the BoE acknowledge the better backdrop as far as real activity is concerned as well as the further disappointment in terms of how productivity is faring.
• Japan: The BOJ decision (Th) will be a close call as recent economic releases were mixed. DE favors (bold) action in July in order to gain better knowledge on price trend and growth momentum. However, surprises have been the norm.
• China: This week brings more key reports on May activity, including industrial production and retail sales (Sun). Bothe figures should provide stability in year-ago comparisons, consistent with our view that growth is bottoming.

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