The Global Markets Weekly – 8/8/16

Posted August 8, 2016 by rvillareal

The Lone Wolf[private]

The very strong employment in the U.S. makes handicapping the chances of FOMC action this year more interesting.  Virtually every facet of the report was strong-payrolls advanced sharply, the workweek rose, and wage gains were sizeable.  Even the steady unemployment rate was a sign of strength since both household employment and the labor force rose briskly.

So what should the FOMC do?  By conventional standards, the economy is doing OK.  The unemployment is historically low at 4.9%.  GDP growth of 2% plus in the last three years is well below the 3% norm but is a much higher than what most countries achieve after a financial shock like 2008.  Just look at Europe and Japan.

GDP growth did slow significantly to only a 1.2% pace over the past year.  But a weaker trade sector and an inventory correction overstated the slowdown, as underlying demand held up much better at 2.0%.  Still, job growth remained above 200K workers per month-a figure more in line with 3% GDP growth than 2% GDP growth.  So GDP growth understates how the economy really feels.

What about inflation?  Investors seem more concerned about deflation than inflation, despite the labor market being close to full employment.  Still, measured inflation has been grinding higher.  Both the overall and core PCE price indexes accelerating about 0.5 percentage point to 0.9% and 1.7% respectively.  However, if underlying labor compensation trends are above 2%, oil prices are stable and labor productivity weak, how long will headline inflation remain below 2%?

So why the caution about hiking rates again?  There are three reasons.  First, the international situation, particularly after Brexit, is problematic.  Europe is a mess, the U.K. may go into recession, China’s financial system might collapse—the list of negatives goes on and on.  Second, the Fed maintains a “policy asymmetry” in favor of hiking later rather than sooner.  They don’t want to be blamed if the economy goes into a pothole if they tighten credit too aggressively.  Higher inflation is a lesser evil, with inflation still so low.  Third, the current political climate makes the Fed even more cautious, suggesting another rate hike after rather than before November.

• U.S.: No Fed talking heads are on tap but the calendar is heavy on Friday. A modest gain in retail sales is likely after the strong June outcome.  Confidence should be steady at a “good” level.  Business inventories may barely increase as firms still grabble with the inventory overhand.
• Eurozone: There are some important pieces of data this week culminating in an update for the Eurozone Q2 GDP release on Friday, this encompassing the German Q2 data released earlier the same day. The German GDP figure will confirm a slowing, albeit only from the aberrantly high reading of the prior quarter.
• UK: Given that some on the MPC think that some of the most-clearly weak survey data may be exaggerating the post-Brexit economic backdrop, the coming week’s data will be of some interest to policy makers and markets alike. Industrial Production numbers for June on Tuesday may show that the last quarter ended on a still solid note. As for surveys, the BoE Agents data (Wed) may also fail to chime with the very downbeat PMI data. However, the July Royal Institution of Chartered Surveyors house price survey (Th) will confirm that the activity in the housing market has softened markedly in reaction to the EU referendum result.
• Japan: Core machinery orders should rebound sharply after two steep declines but the trend remains weak (Wed). Tertiary industry results (Wed) should be stable.
• China: A ton of data hits the tape. The trade balance may show seasonal improvement (Mon), CPI inflation (Tu) and industrial production gains (Fri) should be stable, while retail sales should some strength (Fri).
• Other central banks: In New Zealand, the central bank should longer the policy rate another notch (Th). In India, the RBI should keep policy on hold and expected to do so for some time (Tu). In Korea, a policy rate cut is possible (Th), while in Mexico, policy remains on hold (Th).

gmw_0805[/private]