An unexpectedly strong U.S. jobs report presented 224,000 new non-farm jobs in June, compared with the 165,000 predicted by economists’ consensus, ticking up to a 3.7% unemployment rate as more people were seeking work. This might be good news, but it was not the best timing. As noted last week, this represents the last major employment data point the Federal Reserve will receive prior to its July 30 meeting. Investors might have preferred a weaker report, which would encourage the Fed to return to a more expansionary footing and potentially cut interest rates. That the Labor Department also revealed hourly wages rose 3.1% year-over-year and that the labor participation rate had likewise increased, tends to make the Fed more likely to raise target rates in order to inoculate the economy against inflation than to lower them in order to promote economic growth.
Even so, the equities market largely shrugged off the implications of the Labor Department survey and finished the day only mildly lower. For the week, the S&P 500 gained 1.24% to close at 2,990.41, near the record it claimed Wednesday. The story was similar for the Dow, which improved 0.87% for the week to end at 26,922.12. The news was all the 10-year Treasury note needed for its yield to reverse course in dramatic fashion, whipsawing back above the two-percent threshold and end the week at 2.037%, +8.7bps increase.
Gold futures settled down 1.4% at $1,400.10/ounce as the dollar improved 0.6% against a basket of currencies.
The previous week’s news that the U.S. and China were backing away from belligerent trade postures stayed in the previous week. WTI crude ended the week at $57.51/barrel, down just 9 cents from the preceding Friday.
This week will see a surge of economic news out of the Fed. Chairman Jerome Powell is scheduled to testify before the House Financial Services Committee over the course of two days, coinciding with Wednesday’s release of June’s FOMC meeting minutes, and teeing up the July 17 Beige Book publication.
I. U.S. Economic Data/Markets
- Manufacturing expanded in June, as the Purchasing Managers’ Index registered 51.7, a decrease from the May reading of 52.1. This is the lowest reading since October 2016. This indicates growth in manufacturing for the 34th consecutive month, although there has been a marked softening since September 2018.
- The ISM Prices Index registered 47.9 in June, a decrease from the May reading of 53.2, indicating raw materials prices decreased following one month of increases. Shortages remain in electronic components and food ingredients, although prices have declined in copper, steel, energy, and aluminum.
- Technology firms registered the first fall in business activity since February 2016 in June, according to IHS Markit’s US Sector PMI. The decrease in output was only fractional overall, but the technology sector was the only one to signal contraction. Still, the expansion in consumer goods remained muted overall. In contrast, healthcare firms registered a solid and faster increase in business activity in June, while consumer services reversed its May contraction and expanded once again.
- The IHS Markit U.S. Services Business Activity Index registered 51.5 in June, up from 50.9 in May. June data indicated the second-slowest output increase since August 2016, behind May. The expansion was supported by an acceleration in the rate of increase in new business. The slight pickup in client demand also led to a renewed rise in backlogs of work, with employment increasing moderately to accommodate greater pressure on capacity. Uncertainty regarding future new order growth dampened business confidence further as expectations hit a three-year low.
- Economic activity in the non-manufacturing sector grew in June for the 113th consecutive month, according to the Non-Manufacturing ISM Report On Business. The NMI registered 55.1, lower than the May reading of 56.9. This is the index’s lowest reading since July 2017 and represents continued growth in the non-manufacturing sector, but at a slower rate.
II. Trade
- The US trade deficit widened to $55.5 billion in May from a revised $51.2 billion in the previous month and compared to market expectations of $54.0 billion. Imports surged 3.3% as exports rose at a more muted 2.0%. The politically sensitive goods trade deficit with China increased by 12.2% to $30.2 billion despite recent tariff increases.
- New orders for US manufactured goods declined 0.7% in May, the second consecutive monthly drop, mostly due to lower demand for civilian aircraft and parts. Orders for non-defense capital goods excluding aircraft, which are seen by the Census Bureau as a measure of business spending plans on equipment, were up 0.5% in May.
III. Economics Outside the U.S.
- Chinese Economy
- The June Caixin Manufacturing PMI reported a 49.4 reading, down from 50.2 in the previous month and slightly underperforming expectations. June data highlighted a challenging month for Chinese manufacturers, with trade tensions reportedly causing renewed declines in total sales, export orders, and production. Companies responded by reducing headcounts further and making fewer purchases of raw materials and semi-finished items.
- The Caixin China Composite PMI data, which cover both manufacturing and services, edged down from 51.5 in May to 50.6 in June, showing that business activity in China rose marginally overall. Service sector business activity increases modestly, as did new business, but business confidence weakened to a record low.
- Eurozone Economy
- Eurozone retail sales fell 0.3% in May, contrary to economists’ consensus of a 0.3% rise, according to Eurostat and Reuters.
- Manufacturing operating conditions in the euro area deteriorated for a fifth successive month during June. After accounting for seasonal factors, the IHS Markit Eurozone Manufacturing PMI remained below the crucial 50.0 no-change mark, falling to a three-month low of 47.6, from 47.7 in May.
- The IHS Markit Eurozone PMI Composite Output Index strengthened to 52.2, up from 51.8 in May. This reading was also the highest recorded since November 2018, signaling a pick-up in the economic growth of the single currency area. Still, the headline index masked notable divergences in sector performance. The services economy enjoyed its best rise in eight months, even though the recent downturn in manufacturing continued.
- European Sector PMI reports European metals and mining posted another sharp drop in June, extending the current downturn to ten months. Moreover, the rate of contraction was the fastest since November 2012. Chemicals and forestry and paper products also posted lower output during the month, resulting in the strongest overall decline in basic materials production since April 2009. The downturn in the European automobiles & parts sector continued in June, with output declining for the ninth month running. Still, technology and banking saw robust growth for the month.
- The IHS Markit/BME Germany Manufacturing PMI showed deterioration in business conditions for the sixth month in a row in June. At 45.0, up from 44.3 in May, the index was at a four-month high, but still well below the neutral 50.0 mark and close to its lowest since 2012. Weaker external demand and a slowdown in the auto industry continued to weigh on order books, which in turn led to declines in both output and employment.
- German unemployment fell by 0.1% to 4.9% in June, suggesting the number of jobless there fell by 20,000 to 2.21 million.
- U.K. Economy
- The UK manufacturing sector continued to feel the reverberations of the unwinding of pre-Brexit stockpiling activity during June. At 48.0 in June, down from 49.4 in May, the IHS Markit/CIPS PMI fell for the third consecutive month to its lowest level since February 2013. Manufacturing production contracted at the fastest pace since October 2012. High inventory levels at both manufacturers and their clients led to a scaling back of output and orders, with both domestic and export demand weakening.
- TheIHS Markit/CIPS UK Construction Total Activity Index posted 43.1 in June, down sharply from 48.6 in May. This latest reading signaled the steepest reduction in overall construction output since April 2009, and perhaps the broadest-based. Business activity and incoming new work both fell at the fastest pace in more than 10 years, mainly attributed to risk aversion among clients in response to heightened political and economic uncertainty.
- The IHS Markit/CIPS UK Services PMI posted 50.2 in June, down from 51.0 in May and the lowest reading for three months. Service providers indicated that business activity was close to stagnation in June, which contrasted with the modest recovery seen during the previous month. The latest survey also revealed subdued client demand and a further reduction in work-in-hand. Despite stalling business activity, staffing numbers picked up at the fastest pace since August 2017.
- Canadian Economy
- Employment has held steady for two consecutive months, according to Statistics Canada, but the unemployment rate rose 0.1 percentage points to 5.5% as the number of people looking for work increased. In the second quarter, employment rose by 132,000 (+0.7%), virtually all in full-time work. Year-over-year, employment was up by 421,000 or 2.3%. Over the same period, total hours worked increased by 1.8%.
- At 49.2, the June IHS Markit Canada Manufacturing PMI picked up fractionally from May’s 41-month low of 49.1, but still below the 50.0 no-change value. Falling volumes of new work contributed to the sharpest drop in production for three and a half years. Survey respondents commented on more subdued economic conditions in both domestic and export markets, alongside a drag on sales from global trade frictions.
- Japanese Economy
- Household spending rose 4.0% year-over-year in May, the fastest growth in four years. The growth can be attributed to Japan’s 10-day holiday in May, according to the Statistics Bureau of Japan.
Key data/events this week:
- Monday
- U.S. consumer credit
- U.S. consumer inflation expectations
- Japan average cash earnings
- Tuesday
- U.S. NFIB small business index
- U.S. job openings
- U.S. Redbook retail sales
- U.S. JOLTS job openings
- U.S. API crude oil stock changes
- Japan machine tool orders
- Japan producer price index
- Canada housing starts and building permits
- Australia consumer confidence
- China inflation and producer prices
- Wednesday
- U.S. wholesale inventories
- U.S. mortgage rates and applications
- U.S. wholesale inventories
- U.S. crude oil and gasoline stock changes
- U.K. GDP
- U.K. balance of trade
- U.K. industrial, manufacturing and construction output
- Japan foreign stock and bond investments
- Thursday
- U.S. weekly jobless claims
- U.S. consumer price index/Core CPI
- U.S. report on world agricultural supply and demand estimates
- U.S. monthly federal budget statement
- U.K. financial stability
- Canada new house prices
- China balance of trade
- Friday
- U.S. producer price index
- Japan industrial production and capacity utilization
- Germany wholesale prices
- China foreign direct investment
- China M2 money supply
- Eurozone industrial production
