On Friday, we learned that US companies added 223,000 jobs in June, while the unemployment rate fell to 5.3%, its lowest level since April 2008.
Disappointingly, there was no month-over-month wage growth.
While some of the numbers didn’t blow out economists’ expectations, the overall trend continues to reflect that of an improving labour market in an improving economy. And this is critical in the context of monetary policy most economists expect the Federal Reserve to begin lifting interest rates later this year.
“At the end of the day, it’s all about jobs and the monthly numbers are still printing 200K. The Fed says they won’t wait for wages or inflation to rise before liftoff and we believe them,” Bank of Tokyo-Mitsubishi economist Chris Rupkey said. “The economy is better than the market thinks.”
And then there’s Greece…
Here’s your Monday Scouting Report:
- Greece votes “No.” Greece is in desperate need of bailout financing, but the country and its leaders are unwilling to adopt the fiscal austerity demanded by the entities offering that financing. In a nationwide referendum on Sunday, the Greek people voted “no” to these new demands, pushing the country closer to exiting the euro (i.e. a “grexit”).
- Greece doesn’t really mean much to the US. “[T]he risks of contagion to the US economy and financial system are small,” Capital Economics’ Julian Jessop explained. “The direct links between the US and Greece (whose economy now accounts for a trivial 0.3% of global output) are obviously tiny. However, even exports to the EU as a whole only represented 1.5% of US GDP last year. The collapse of one or more large European banks could have a major impact on the US, but we would expect that risk to be much smaller than in 2012, when Greece was last close to the brink. US financial institutions are now in better shape and have had plenty of time to mitigate their exposure.”
- …what about US monetary policy? The Federal Reserve is preparing to tighten monetary policy as the US economy has recovered substantially since the financial crisis. But could turmoil in the eurozone triggered by Greece cause the Fed to balk? Here’s Jessop again: “The Fed would, of course, be reluctant to hike rates for the first time since 2006 in the midst of another global financial crisis triggered by Greek exit from the euro. However, we do not expect contagion from developments in Europe to be severe enough to prevent the US central bank from pressing ahead with a September lift-off, provided domestic fundamentals continue to strengthen… [T]he Fed’s decision will ultimately depend on domestic economic data and fundamentals. The labour market is buoyant and wage and core price pressures are picking up, meaning that it is increasingly hard to justify keeping rates at emergency lows of close to zero. A crisis in far-away Greece is unlikely to change this.”
- Markit US Services PMI (Mon): Economists estimate this index of services activity slipped to 54.9 in June from 56.2 in May. “A slowdown in the economy at the end of the second quarter may mean the Fed takes a further pause for thought before hiking interest rates,” Markit’s Chris Williamson said. “With the exceptions of the weather-related slowdown at the turn of the year and the 2013 government shutdown, June saw the weakest pace of economic growth since May 2013.”
- ISM Non-Manufacturing Index (Mon): Economists estimate this services activity index climbed to 56.4 in June from 55.7 in May. From BNP Paribas: “With the labour market improving solidly, spending picking up, and elevated consumer confidence, we expect business activity to have expanded further in June.’
- Trade Balance (Tues): Economists estimate the US trade deficit widened to $US42.7 billion in May from $US40.9 billion in April. From Barclays: “Trade data have been volatile in recent months as a result of the West Coast port strikes that were resolved in mid-February. Imports from the Asia-Pacific region, the primary trade flow through California ports, plunged in January and February before surging in March as backed-up container ships were finally unloaded. At the same time, exports have softened over the past six months on weak international demand and the stronger dollar.”
- Job Openings & Labour Turnover Survey (Tues): Economists estimate the JOLTS report will reveal US companies had 5.3 million job openings in May. “The job openings data suggest rising wage pressures,” UBS’s Kevin Cummins said.
- FOMC Minutes (Wed): At 2:00 p.m. ET, the Federal Reserve will publish the minutes from its June 16-17 Federal Open Market Committee (FOMC) meeting. Here’s Bank of America Merrill Lynch: “The June FOMC statement had a modest upgrade to the discussion of the economic outlook after the disappointing 1Q, but the markets largely focused on the more dovish decline in the dot plot. As a result, the key thing to look for in the June minutes will be the debate around the pace of hikes for this year: will the majority appear to lean toward two or just one hike? In light of the Fed’s professed data-dependent approach to policy, the discussion around the forecasts and whether they could satisfy the conditions for liftoff in September will also receive significant attention — although we don’t expect many specifics in the minutes. We do suspect the bar for the first rate hike is not all that high, and the minutes historically have had a tendency to sound more hawkish than the meeting itself (albeit less so recently).”
Consumer Credit (Wed): Economists estimate consumer credit balances increased by
$US18.5 billion in May. From Wells Fargo’s Sam Bullard: “Based on the strength of core retail sales (up 0.7%) and motor vehicle sales (to a nine-year high of 17.7 million annualized units), consumer credit growth likely recorded another solid reading in May. Both revolving and nonrevolving credit are likely to show solid momentum as the economic expansion continues. YTD, consumer credit outstanding has averaged $US16.64 billion per month.”
- Initial Jobless Claims (Thurs): Economists estimate initial claims fell to 277,000 from 281,000 a week ago. Here’s UBS’s Kevin Cummins: “Despite a rise in the last week of June, initial jobless claims continue to trend sideways at low levels. We forecast a drop in the upcoming week, although claims can be especially volatile around this time of year because of seasonal adjustment problems relating to annual summer shutdowns (particularly in the auto sector) and the timing of Independence Day. These uncertainties make the data series very unreliable as an indicator of the direction of labour market conditions at this time of year.”
“IF this historic “no” win is confirmed, look initially for a general selloff in global equities, along with price pressures on the bonds issued by Greece, other peripheral Eurozone economies and emerging markets,” Allianz’s Mohamed El-Erian wrote in a post on Facebook.