US Jobs Data, Soft European Data Featured

Today’s US jobs data is only focus ahead of the weekend. The data that economists use to help forecast this volatile series, like the ISM reports, Challenger survey, and the ADP report were generally supportive. The one important offset was the weekly initial jobless claims rose during the survey week.

As is often the case, it seems likely the real issue is expectations. Strong private sector jobs growth in March and April (158k and 241k respectively) were outliers. The 3-month average of private sector job growth is 119k, but this includes April’s jump. The last two month average is 58k and the July reading is expected to be well above this. The headline figure though is going to be skewed by the census workers.

However, the risk is that the market underestimates these and there may be some impact from the state and local governments, most of which began new fiscal years July 1 and new austerity measures may have led to additional job losses. The risk then is the headline figure is weaker than expected and while private sector jobs may be better than expected. The unemployment rate is a function of the ebb and flows of the labor force participation rate. However, the sluggish jobs growth is not sufficient to absorb even the normal growth of the labor market. On the other hand, other components of the labor market like the length of the work week and earnings are expected to recover form the weakness in June. Recall that given the size of the US work force a 0.1% increase in the work week is tantamount to the output of more than 300k workers.

If this assessment is generally accurate, then the case for renewed asset purchases by the Fed would seem to lessen. Both ISM reading were above 50, showing an expanding economy. US Treasury yields and mortgage rates are already near record lows as is the spread between them. The lack of new mortgage bonds have contributed to disruptions in the market and more purchases of MBS by the Fed would not be helpful. News wire interviews with primary dealers suggest many have told the Fed that they do not want the Fed to resume MBS or Treasury purchases.

One of the factors behind sterling and the euro’s recovery in recent weeks has been better than expected economic data in general and when the data has disappointed, the market largely shrugged it off. A reversal of euro and sterling gains appears to require a break of this pattern. Today’s UK and German data is a step in this direction, but 1) a single data point does not make a trend and 2) the proximity of the US jobs report may also be skewing the response. However, both the UK and German industrial production figures were disappointing and both currencies softened.

Industrial output was expected to have risen by 0.2% in the UK and instead it fell by 0.5%. The ONS attributed it to weakness in oil and gas and suggested the market should expect little impact on Q2 GDP figures. Manufacturing itself did rise by 0.3%, which was a tad below consensus forecasts. Separately, the UK reported a 1% drop in input PPI prices, which was twice the decline the market expected. Output prices rose a minor 0.1%, though the consensus had expected a flat report. There is little in the data that the MPC’s dissenter Sentance can use to garner support for a near-term rate hike. In Germany’s case, after the strong orders data, PMI and ZEW reports, the consensus expected a 0.5% increase in June industrial output. Instead it fell by 0.6%. In the larger picture, it is may be downplayed because May’s outsized gain was revised to 2.9% from 2.6% and a two-month view may offer a more accurate picture.

Separately, there were other reports from Europe that are noteworthy. First, Spain’s central bank said that Q2 GDP rose 0.2% after a 0.1% pace in Q1. The year-over-year rate stands at -0.2% after -1.3% in Q1. Spain’s recovery is fragile and the fiscal austerity may prevent much of acceleration from here. Italy reported 0.4% growth in Q2, the same as in Q1 and the year-over-year pace improved to 1.1% from 0.5% in Q1. Separately, note that while PM Berlusconi survived another vote of confidence this week, there is increasing speculation of an early election. Lastly, recall that ECB officials expressed concern about Greece inflation earlier this week and the IMF revised up its forecast for Greece inflation this year.

Today Greece reported that July CPI rose to 5.5% year-over-year from 5.2% in June. This is still picking up base effects as the monthly rate fell 0.5% after a 0.3% decline. Part of the inflation in Greece reflects an increase in the VAT (in terms of rate and coverage in that it was expanded to more services. Inflationary pressures are likely to subside and the risk of deflation is likely to grow in the coming months.