MT: Data on healthy jobs is bad news for the economy

Today’s Podcast

Overview always the same

  • Payroll S +372k, unemployment unch. at 3.6%, AHE 5.1% vs. 5.3%
  • US stocks end NY flat against pre-US payrolls, 2-year yields +10bps at 3.1%
  • The USD was little changed on the day after hitting new cycle highs
  • New York Fed’s Williams: Inflation ‘soaring’, must be ‘solved, can’t fail’
  • ECB hawk Holtzmann wants 50bps hike in July, maybe 75bps in September
  • Week Ahead: US CPI, China Q2 GDP, RBNZ, BoC, AU Jobs, US Earnings

Oh, you’re still the same (still the same, baby, baby, still the same) – Bob Seger

Friday/Weekend Data Highlights

US non-farm payroll employment in June 372k vs 265k expected (April/May revision -74k)

Unemployment rate in the United States in June at 3.6% against 3.6% as expected

US average hourly wage in June 0.3% m/m as expected

Average US hourly wage in June 5.1% YoY vs. revised forecast of 5.3% (5.2%) and 5.0%

Participation rate in the United States in June 62.2% against 62.3% and 62.4% expected

Employment in Canada in June -43.2k vs. 22.5k expected

Unemployment rate in Canada in June 4.9% vs. 5.1% and 5.15 expected

Labor force participation rate in Canada 64.9% vs. 65.3% and 65.3% expected

China June CPI 2.5% vs. 2.1% and 2.4% expected

China June PPI 6.1% vs. 6.4% and 6.0% expected

If a looser US labor market is part of the solution to the US inflation problem, there was little concrete evidence of it in Friday’s June payroll report. A sharp downward revision of 74,000 in payrolls over April and May combined slightly muddied the higher-than-expected June headline of 372,000, but the jobless rate came in at 3.6% (its highest post-pandemic low) for the fourth consecutive month, while average incomes growth is still above 5% year-on-year, although the monthly rate was only 0.3% after the upward revision of May to 0.4% from 0.3%, suggesting that annual growth could fall back to closer to 4% in the coming months.

The absence of unpleasant surprises in the report led to a immediate sale of bonds , 2- and 10-year Treasury yields rose 10 basis points or more, gains that were sustained through the end of the New York session (2s ending at 3.105%, 10s at 3, 08%). Money markets raised prices for the July 27 FOMC rate decision to 74 basis points from 71 basis points the previous day (and in Canada after its labor market report, by 72.5 basis points to 75.3 basis points, following its unemployment rate falling to 4.9% from 5.1%, although due to a drop in the participation rate to 64.9% from 65.3% ).

US Bonds Friday and Weekly

Bostic, President of the Atlanta Fed who did not vote this year, spoke after the jobs report and said he supported a second 75 basis point hike later this month due to “the huge momentum of the economy”.

New York Fed President John Williams in a Friday speech, did not directly refer to the payrolls report or specify his preference for the size of the next rate hike, but said U.S. economic growth could fall below 1% this year and remain slow through 2023 as the Fed acts “resolutely” to rein in inflation. He reiterated the increasingly strong language used by FOMC officials to characterize their determination to reduce inflation to the Fed’s 2% target. “Inflation is sky-high, and that’s the number one danger to the overall health and stability of a well-functioning economy,” Williams said. “I want to be clear: this is not an easy task. We must be determined and we cannot fail.

In other US news Friday, President Joe Biden sthe aid that he has not decided to remove one of the tariffs on Chinese imports. “I haven’t made that decision yet,” Biden told reporters at the White House in response to a question about tariffs. “They go through them one by one,” he added in an apparent reference to administration officials.

Other CBs talk about note since we stopped on Friday included ECB Governing Council member and uber-hawk Robert Holtzmann, who said the ECB should raise rates by up to 125 basis points by September if the inflation outlook does not improve. A first hike in July should be 50 basis points and an even bigger step should be considered at the September 8 meeting to proactively steer the economy towards calmer waters, Holzmann told the Kronen Zeitung newspaper in an interview published on Saturday. “When the situation does not improve, an increase of 0.75 percentage points may eventually become necessary,” he said. “Now is the time for clear rate breaks, otherwise inflation will solidify.”

Also considered a hawk, comrade Klass Knot, member of the ECB GC Speaking on a Dutch talk show, he said: “It may well be that as the economy slows down in the months and quarters to come, we will raise interest rates… is very likely… in an ideal world, you would want to stimulate the economy but lower inflation at the same time… unfortunately this is not what you can do, you have to make a choice; in this case, our mandate is very clear: we must choose to lower inflation.

Christine Lagarde, President of the ECB Meanwhile, she said she didn’t want to prevent her colleagues from speaking out on monetary policy, as she recognized that communication is a challenge at present. “There is no intention to suppress certain views or to question the independence of individual members of the Governing Council,” she said in a letter to a European Parliament lawmaker. “Having the diverse views of policy makers publicly aired in a timely manner strengthens the robustness of our decision-making process.”

Also, the weekend CPI China June came in at 2.5% year-on-year, vs. 2.1% and vs. 2.4% expected, driven by higher pork prices. Excluding food and energy, 1.0% versus 0.9%. Annual PPI inflation slipped to 6.1% from 6.4% and from 6.0% expected. The monthly reading was stable.

Friday and weekly actions

US stock markets initially sold off in conjunction with rising US bond yields on the payrolls release, but rallied during the session to end the day little changed (S&P500 down less than 0.1%, NASDAQ up up just over 0.1%). With the exception of Shanghai and Hong Kong, it was a positive week for most equity markets, led by NASDAQ. Let’s see if the gains can survive the US quarterly earnings season which kicks off on Thursday.

Nine of eleven S&P500 sub-sectors ended lower on Friday (Healthcare +0.3% and IT +0.1% the exceptions) led by a 1.0% decline for Materials during what has been a down day (and week) for most commodities, which is consistent with concerns about demand destruction implicit in a global economic downturn (chart below). The exceptions on Friday were crude oil (+2%) and thermal coal (+0.9%). In Week, exceptional demand for coal – the main driver of Australia’s record May trade surplus – continues to shine with another Price increase of 6.6%.

FX Friday and Weekly

Indeed, there were only limited net moves on Friday, but that was only after the mighty USD hit new cycle highs in index terms, led by EUR/USD falling again briefly below 1.01 (payroll before the United States). The USD eased alongside a rally in US equities, although US bond yields retained all of their reflex post-payroll gains.

On the week, it was still very good for the USD up 1.8% in DXY terms (EUR/USD down more than 2% on the week) with the broader Bloomberg BBDXY up 1.1%. The surprise then is that the only major currency to outperform a rising USD was the AUD, AUD/USD recovering from its midweek dip to a new post-pandemic low just above 0.6760 to 0.6858 for a weekly rise of 0.7%. Indicative, perhaps, of better price action in either direction emerging at levels that are, fundamentally, significantly undervalued.

Goods Friday and Weekly


  • A big week ahead in terms of data and events, with star billing through Wednesday/s U.S. June CPI Reportwhere headline inflation is expected to increase further, to 8.8% from 8.6% in May, but core inflation (excluding food and energy) has fallen to 5.7% from 6.0%. Also of great interest (Friday) will be the preliminary UoM Consumer Sentiment index, especially the latest Inflation expectations over 5 to 10 years reading (which, let us remember, went from 3.0% to 3.3% in June during the preliminary reading to be revised to 3.1% in the final version). An unexpected weakness is that these releases will be needed to dislodge expectations of a 75 basis point Fed rate hike on July 27, which fell from around 71 basis points to 74 basis points after the report on payroll.
  • US quarterly earnings season kicks off Thursday with JP Morgan and Morgan Stanley leading the way, followed by Citigroup and Wells Fargo on Friday (Goldman Sachs and Bank of America the following Monday).
  • China Q2 GDP and Friday’s June activity readings are the other significant data releases globally, where, in quarterly terms, GDP is expected to have contracted by 2.3%, reflecting the full impact of the various related lockdowns to the zero covid policy, centered on Shanghai. Year-on-year GDP is estimated at just 1% down from 4.8% and year-to-date at 2.9% from 4.8%. All of these numbers should highlight the near impossibility of meeting the 5.5% full-year growth target without significant additional stimulus beyond last week’s allocation for the intensification of local government bond issues in the second half. Trade data from China is also due this week, Wednesday.
  • Closer to home, the RBNZ The OCR is universally expected to rise another 50 basis points on Wednesday, bringing it to 2.5%. There is a little more uncertainty about the Bank of Canada, also Wednesday, with a majority of analysts expecting +75 basis points (to 2.5%) but 7 of 21 polled by Bloomberg expect +50 basis points and one at 1.0%. We are in the 75bps camp.
  • In Australia, Thursday’s Labor Force Surveyy should confirm a labor market which, in the words of the RBA, “is tighter than it has been for some time”. We (and the consensus) are forecasting job growth of 30,000 in June and the unemployment rate falling by a tenth to a new 48-year low of 3.8%. Before that, Tuesday sees both July’s consumer confidence reading and June’s NAB Business Survey.

Market price

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