July's employment report showed growth continuing; the Fed sounded optimistic about growth in its latest statement; the UK's rate rise was about normalization, not Brexit; China took some market-based steps in the currency market.
“The Chinese side always believes that bad things can turn into good things and challenges can be turned into opportunities.”
U.S. Jobs: Still hiring July’s employment report was solid if unexciting, with an as-expected 3.9% unemployment rate and a labor participation rate also unchanged at 62.9%. This was a good-news/bad-news report, with non-farm payrolls rising 170k, less than the expected 193k, average hours worked unchanged from May at 34.5 and hourly wages still rising at an unchanged 2.7% annualized rate.
One bright spot in the July report was in manufacturing, where employment rose a larger-then-expected 37k, bringing the total for manufacturing and related jobs added over the past 12 months to 688k, the largest 12-month increase since November 1994. The real significance, however, was to be found in timing; July was the first full month of the first set of tariff hikes. The employment category of “manufacturers, builders, miners and drillers”, where the impact of tariffs might be expected to make employers hesitant to add workers, showed an increase, rather than a decrease.
The Fed: Upgraded Outlook As was widely expected, the FOMC’s August meeting saw no change in the Fed Funds target rate, maintained at 2.0%. The decision was unanimous among the eight voting members, leaving readers to pore over the brief statement for clues about shifts in outlook. Confidence in the strength of the economy was easy to find as “solid” was replaced with “strong”. In addition, the cautious words “for now”, included in Chair Powell’s Congressional testimony, were absent from the statement, suggesting increased resolve to stick to the plan to raise rates.
But there was a hint that inflation wasn’t as strong as previously expected, describing it as “near” its 2% target rather than “at or over” that level. Does that shift in language suggest that the Fed anticipates weakness in inflation that hasn’t yet shown up in the numbers? The answer may be contained in the economic forecast which will accompany the next FOMC meeting, which will conclude on September 26.
UK: Straight talk Bank of England Governor Mark Carney held interviews right after the Bank of England raised its policy rate 25 basis points to 0.75% in a unanimous vote. During one such session, Mr. Carney said that the odds of Britain leaving the European Union (EU) without an agreement were “uncomfortably high”, setting off a debate about whether the hike was premature, or even wrong-headed.
But this hike appeared to be about rate normalization after the 2008-9 Global Financial Crisis rather than about Brexit. This hike had been expected to take place in March or April 2018 and was delayed until now due to local economic issues.
China: Market based change The People’s Bank of China announced the reinstatement of a 20% reserve requirement on banks that sell dollars to clients using currency forward contracts. The reserve requirement had been lifted in September 2017, after its initial instatement in October 2015 during a period of decline in the currency. Banks are required to pass this cost along to their clients whose trades meet the requirement. This change makes it more expensive for these clients to buy dollars in exchange for yuan, reducing the financial incentive for this trading and reducing selling pressure on the yuan.
All market-related data Source: Bloomberg, August 3, 2018 unless otherwise stated