Greeks Split Down Middle Before Bailout Referendum: Bloomberg Poll
Fed to remain cautious as hiring remains impressive but wage growth disappoints
Non-farm payrolls increased by 223,000 in June, just shy of expectations of a 233,000 rise and in line with Markit’s PMI survey data, which pointed to a 220,000 increase.
Although behind expectations, and accompanied by news that April and May had collectively seen 60,000 fewer new jobs added than previously thought (a downward revision that was also signalled by the PMI), the latest upturn suggests that the encouragingly strong run of job creation seen in recent years shows few signs of stalling.
The additional hiring helped push the unemployment rate down to a seven-year low of 5.3% from 5.5% (albeit aided by a drop in the participation rate), edging closer to the 5.0-5.2% range which is widely seen as indicative of full employment and beating expectations of a dip to 5.4%.
Wage growth – widely viewed as a critical indicator of when policymakers will feel comfortable that the economy can withstand higher borrowing costs – failed to impress, remaining a bothersome fly in the ointment of the recovery story. Average hourly earnings were unchanged, meaning wages are up just 2.0% over the past year, missing expectations of a 2.3% rise.
The sense is that the Fed is, again, going blind with conflicting economic reports and revisions. Thursday’s employment report was disappointing in many ways:
- Given revisions to the previous 2 months, payroll employment was up only 163k in June while household employment declined 56k, the first contraction since April 2014. Payroll growth averaged 208k per month in the last 6 months, down 26% from 280k during the second half of 2014.
- The participation rate declined, breaking down to a new low since 1977, right when conditions seem to suggest rising participation. Sixty percent of the June decline was in the prime 25-54 segment, a true mystery. Full-time employment cratered 349k, eliminating all the growth in full-time jobs since March.
- Hourly Earnings were unchanged and up only 2.0% YoY, indicative of generally weak labor demand. Or is it that some 65% of the new jobs were in the low-paying areas (80% in May)?
- Manufacturing employment rose only 4k in June, its average since February after rising by 25k per month on average in the last 6 months of 2014. How could the ISM manufacturing employment index surge to 55.5 in June while Markit’s manufacturing employment gauge kept accelerating is another mystery.
NBF remains hopeful that the economy is advancing toward a rate hike:
(…) Despite the June letdown, we still think that a September rate hike is possible. That’s because we see GDP growth accelerating markedly in the coming months. As today’s Hot Charts show, the Conference Board’s leading economic indicator (LEI) is showing growth of 7% annualized over the past three months. As shown, a jump of this amplitude is normally associated with real GDP growth in the 4-to-5% range. If we are right, labour market strength should soon resume and full-time jobs should hit a new record high by the end of the summer. For a data-dependent Federal Reserve, it would be hard not to follow through with rate hike (assuming the European situation does not worsen).
There are no more timely and dependable data than rail carloads. The AAR published its June data yesterday:
U.S. carloads excluding coal and grain were down 2.5% (16,472 carloads) in June 2015 from June 2014, their fourth straight year-over-year monthly decline. That hadn’t happened since late 2009. In Q2 2015, they were down 2.7% from Q2 2014, the first such decline since Q4 2009. As far as we are aware, no set of rail commodities has a stronger correlation to GDP growth since 2009 than carloads excluding coal and grain. Hopefully, the recent weakness in carloads is an anomaly, rather than in indication that the economy is going to run into problems.
Dan Keen, the editor of Rail Time Indicators has a keen eye for data and his analysis helps explain the lull in manufacturing and wages:
Energy could help explain why. Here at RTI we aren’t experts in the steel industry, but it seems reasonable to us that some of the recent sharp declines in steel-related rail traffic is related to slower energy/drilling activity. (According to the most recent release on oil rig count by Baker Hughes, the rig count for the week ending on June 26th was 628, the 29th-straight weekly decline. The rig count is nearly 60% lower now than at this time last year.) The slowdown in drilling also negatively impacts demand for frac sand, which is a key component of the crushed stone, sand, and gravel rail category. And, of course, it also impacts crude oil production. Crude oil accounts for roughly half of the petroleum and petroleum products rail category.
It thus seems that the decline in oil prices is having a greater negative impact on the U.S. economy than previously thought and currently acknowledged. Adding the effects of the rising dollar, the U.S. economy seems stuck in a Goldilocks state where growth is only so-so and generates little inflationary trends, keeping the Fed on the sidelines. If profits can keep rising while other central banks continue to provide excess liquidity, equities could well continue to surf at their current high valuations for a while longer.
(…) Fed-funds futures, which are used to place bets on central bank policy, showed Thursday that investors and traders see a 12% likelihood of a rate increase at the September meeting, compared with 17% before the jobs report, according to CME Group.
The odds for a rate increase at the December meeting were 49%, compared with 59% before the data. (…)
Speaking of oil:
The number of U.S. oil-drilling rigs rose by 12 to 640 over the past week, snapping 29 straight weeks of decline, Baker Hughes data showed late Thursday. The rig-count, a proxy for activity in the oil industry, has fallen sharply since oil prices headed south last year. U.S. oil output, however, has remained strong and continued to pressure oil prices.
Though this is the first increase since 2014, there are still about 60% fewer rigs working since a peak of 1,609 in October. (…)
(…) On the production line in Louisville, workers rush to put together the components of their main product, the Ford Escape, a compact sport utility vehicle from the hottest section of the market. In 2012, they were producing 320,000 vehicles per year. Now they have to turn out 400,000. (…)
The US is experiencing a motoring renaissance. The distance the average American travelled by road last year rose for the first time since 2005, and the number of people travelling by car over the July 4 holiday weekend is expected to reach 35.5m, the highest figure in more than a decade, according to the American Automobile Association. (…)
Some trends that hurt the motor industry have not gone away: young people are getting their driving licences later; more old people are moving to city centres to live car-free; and cycling and carpooling are becoming more popular. But talk of the end of car culture has faded. (…)
The rediscovered enthusiasm for driving is much more marked in the US than in Europe. Europeans already pay a lot more for fuel: the average at UK petrol stations today is the equivalent of nearly $7 per gallon. And they are less likely to notice and react to swings in the price of crude oil because taxes make up at least half the pump price across the EU. (…)
China rate cuts to hit copper carry trade Beijing’s easing could ’significantly reduce’ demand for red metal, says report
(…) For years, while interest rates in China were much higher than international levels, one trade was to borrow money offshore using a letter of credit from a bank to import commodities, put it in a warehouse, and then invest the money in higher-yielding assets like property, financial products, or even, according to one report, in toy factories.
Copper was one of the most popular among such commodities carry trades, but “due to the importance of the Shanghai copper holdings for the global copper market, any unwinding or change in interest rate differentials will have significant impact on global commodity market pricing and trading,” according to a new paper called “Carry Trade Dynamics under Capital Controls: The Case of China”.
The authors, Zhang Xiao, a fixed-income analyst with BNP Paribas, and Christopher Balding, associate professor at the HSBC Business School at Peking University’s Graduate School in Shenzhen, find strong evidence that Chinese copper stocks were being used “primarily to facilitate a carry trade under capital controls”.
The paper shows that inventory of copper in Shanghai grew from 4 per cent of global stock in 2009 to 38 per cent in 2014. That was helped by the difference in interest rates between China and the rest of the world which averaged 358 basis points from January 2009 to March 2015.
For every 1 basis point increase in the onshore-offshore interest rate differential, copper carry trade positions increased by an estimated $1.5m, according to the paper.
Over the same period, industrial production did not show evidence of a change that requires such a large supporting change in inventory, they write.
If they are right, China’s copper demand will continue to fall. (…)
Some Chinese executives estimate that as much as 70 per cent of China’s imports of refined copper were used to obtain financing rather than for consumption. (…)
Commodities from soybeans to rubber were also used to get around and take advantage of China’s capital controls, which restrict the flow of money in and out of the country.
Goldman Sachs said last year that such transactions could be as high as $160bn, or 31 per cent of China’s total short-term foreign-exchange loans. (…)
South Korea Unveils $20B Fiscal Stimulus to Spur Economy
(…) Three weeks ago, the central bank cut interest rates to help boost sluggish exports and consumer spending hit by the viral-disease outbreak.
The 22-trillion-won ($19.6 billion) fiscal stimulus will include a 12-trillion-won extra budget–mostly to be funded by issuing government debt–and various state funds. It will focus on financing MERS-hit businesses and reinforcing quarantine facilities, as well as creating more jobs. It will also be used to fight droughts and floods.
MERS, which has infected more than 180 people and killed at least 33 in Korea since its outbreak in May, has dented retail sales and tourism, as people worried about infections have stayed home and cancelled trips.
China Accelerates Efforts to Stem Selloff China shares tumbled Friday, even as Beijing moves swiftly to try to plug losses, with the smaller Shenzhen index suffering its worst week since December 1996.
The Shanghai Composite, which ended down 5.8%, lost 12.1% this week and more than a quarter of its value since a high on June 12. The Shenzhen Composite fell 5.3% while the ChiNext board, composed of small-cap stocks, lost 1.7%. Both are down more than a third from peaks last month, with weekly losses of 16.2% and 10.8%, respectively. (…)
On Friday, China’s securities regulator said it would slow the pace of approving new stock offerings and limit their size. Initial public offerings can create volatility as investors sell shares to free up funds to invest in new listings. (…)
Also on Friday, China Securities Finance Corp., an arm of China’s securities regulator, said it would more than quadruple its capital base to about 100 billion yuan ($16 billion) from 24 billion yuan, said Mr. Zhang. The institution is the only one on the mainland that offers margin financing services to brokerages.
Some analysts are putting Friday’s losses to margin calls. Brokerages issue such calls to investors who have borrowed money from them, when stocks held by the investor, effectively collateral for the loan, fall below a certain threshold. (…)
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China regulators target short sellers Futures exchange using ‘window guidance’ to discourage bearish bets
(…) The futures exchange on Thursday denied rumours that foreign investors including Goldman Sachs were using futures to place big bearish bets on mainland stocks, known as A shares.
The exchange said foreign investors with access to the futures market via the Qualified Foreign Institutional Investor (QFII) programme were only permitted to use futures for hedging operations and are not allowed to make directional bets. All recent trades by QFIIs complied with regulations, it said.
Some of the key factors:
(…) Retail punters account for 80-90 per cent of trading in the Chinese equity markets. Many of them are new to investing — in May alone 12m trading accounts were opened. That means millions of people trading stocks have little or no direct memory of the 2007-8 stock market bubble and crash.
Even professional fund managers in China often act with very short-term horizons. Many are measured on monthly or quarterly performance, adding pressure to chase the market higher as it moves. (…)
The system for new listings in China remains tightly controlled by the authorities. The state in effect sets the price of new share sales, virtually guaranteeing quick bumper returns for those able to buy in. Even on days when the Shanghai market has fallen sharply, IPOs have typically risen by the daily limit of 44 per cent.
The result is that investors pull cash from the market ahead of new listings, draining billions of dollars of liquidity for a number of days. That can torpedo the market, but then push it back up when the funds are unlocked again.
Real life lesson on how overvalued and over leveraged equities can correct almost on their own…The WSJ adds this other lesson:
(…) China gets all sorts of credit for managing its economic boom over the past three decades. But promoting an equity market bubble — including vocal cheerleading in state media — was a clear policy mistake. It is a reminder that China’s reputation for omnipotence in economic matters is hardly unassailable.
Similar mistakes handling the economy’s deleveraging could prove more devastating. A campaign this year to clean up local government debt turned out to be insufficiently thought through. Beijing had to walk back key elements and supplement the program with a bailout through a central bank bond swap program.
Another area where investors have come to rely on Beijing is the currency. Even as it professes to let market forces play a larger role, China keeps a firm hand on the yuan with daily exchange rate setting and periodic market interventions.
(…) the weakness of the euro and the yen means that on trade-weighted, inflation adjusted terms, the yuan has strengthened 13% over the past year, according to the Bank of International Settlements. Against this backdrop, the yuan would probably be falling against the dollar if left to its own devices.
While the chances of a currency unraveling are remote, Beijing’s ability to withstand the pain of a strong yuan in the face of a sluggish economy may necessitate a change in tack when investors least expect it.
Just because China has had success controlling market forces in the past, doesn’t mean it always will.
YoY, light truck sales are +8.9%. Autos –6.1%.
Employers took on 8.2 million square feet of additional office space in the second quarter, marking one of the stronger periods since the recession but a relatively modest expansion by historical standards, according to real-estate research service Reis Inc. 
