U.S. Jobs: Good News. vs. Market News

U.S. Jobs: Good News. vs. Market News

The August jobs report came in with strong headline figures, spooking bond markets already nervous about other signs of growth; Eurozone growth had a solid summer; Argentina and Turkey followed their own paths toward recovery


"The fallout from the [2008] crisis …is [a] key factors in explaining the backlash against globalization…and the erosion of trust in government and other institutions"
IMF Managing Director Christine Lagarde

U.S. jobs: Flattened, not Flattered, by Good News August was a strong month for jobs; the U.S. added 201k jobs, higher than expected and average hourly earnings rose to a cycle high of 2.9% year-over-year. The slight bump in the headline unemployment rate, to 3.9%, was likely related to the labor participation rate falling slightly to 62.7%. But that was offset by the underemployment rate, which fell to 7.4%, a figure not seen since October 2000.

U.S. stocks were off slightly at the beginning of trading and recovered by mid-morning.  But the U.S. Treasury yield curve told a different story by flattening decisively; yields between the 3-year and 10-year moved upward by as much as 6.8 basis points (bps); the closely-watched 10-year up 5.84 basis points to 2.931%, and the 30-year rose a smaller 4.05 bps to 3.094%.

The most likely explanation was market logic at its finest: too much positive news about the economy could be a harbinger of even more growth, encouraging the Fed to raise its rates either more, or more frequently in the coming months than its clearly-signaled plan. It’s the prospect of premature tightening, which could hasten the onset of a future recession, that appeared to be the main culprit.

That’s a switch from concerns earlier in the week that increasingly confrontational trade negotiations could injure the good times already in progress. Evidence for strength in manufacturing for August was clear, with the Institute for Supply Management (ISM) manufacturing index surprising to the upside at 61.3 and ISM new orders rising to 65.1 from July’s 60.2.[1] In fairness, current tariffs could be responsible for the continued high level of the prices paid index, which reached a higher-than-expected 72.1 for the month.

Eurozone: Strong Summer Season Figures for Q2 showed gross fixed-capital investment growing 1.2% vs. Q1, above consensus, supporting the early estimate of GDP growth for Q2 at a healthy 2.1% year-on-year. And despite the pullback in retail sales in July of (0.2%), the year-on-year figure rose 1.1%. Like the U.S., producer prices rose slightly above expectations at 0.4% since June and 4.0% year-on-year. It’s unclear whether this rise was due to increased demand or increasing prices from other suppliers, including imports.

Argentina, Turkey: Talks continue, but with whom? Argentina’s top economic advisers spent most of the week in discussions with International Monetary Fund officials in Washington, looking for ways to support Argentina that would convince financial markets – especially lenders – to resume doing business as before, or better. Meanwhile, Turkey’s central bank stated it wouldn’t make any additional moves before its previously-scheduled September 13 meeting, which it stated would introduce policy adjustments. That announcement may have made matters worse by heightening expectations.  Without fanfare, Turkey raised its overnight lending rate by 150 bps and another 150 bps for “late liquidity”, bringing the top rate, but not the overall policy rate, to 20.75%.

Over the past five days, the Turkish lira has actually appreciated by 1.9% to 6.42 vs. the dollar, and the Argentine peso barely moved, now trading at a low-liquidity 36.83 per dollar.

 

All market-related data Source: Bloomberg, September 6, 2018 unless otherwise stated

[1] The Institute for Supply Management’s (ISM) Purchasing Managers Indexes (PMI) for the US manufacturing sector measure sentiment based on survey data collected from a representative panel of manufacturing and services firms. PMI levels greater than 50 indicate expansion; below 50, contraction. 

 

 

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