Payroll employment rises by 678,000 in February; unemployment rate edges down to 3.8%

The labor force participation rate, at 62.3 percent in February, changed little over the month. The employment-population ratio edged up to 59.9 percent. Both measures remain below their February 2020 levels (63.4 percent and 61.2 percent, respectively).

The change in total nonfarm payroll employment for December was revised up by 78,000, from +510,000 to +588,000, and the change for January was revised up by 14,000, from +467,000 to +481,000. With these revisions, employment in December and January combined is 92,000 higher than previously reported.

The average workweek for all employees on private nonfarm payrolls rose by 0.1 hour to 34.7 hours in February.

Average hourly earnings for all employees on private nonfarm payrolls, at $31.58 in February, were little changed over the month (+1 cent), after large increases in recent months. Over the past 12 months, average hourly earnings have increased by 5.1 percent. In February, average hourly earnings of private sector production and nonsupervisory employees rose by 8 cents [+0.3%] to $26.94.

U.S. SERVICES PMI

Markit: Sharp upturn in activity amid stronger demand conditions, but selling price inflation reaches new high

Business activity across the US service sector increased sharply in February, according to the latest PMI^TM data. The faster rise in output was supported by the steepest upturn in new sales for seven months. Total new orders were also aided by a solid increase in foreign client demand. In line with improved demand conditions, firms expanded their workforce numbers at the fastest pace since last May. At the same time, business confidence was buoyed by new opportunities for growth following the easing of COVID-19 restrictions, with the degree of optimism reaching the strongest since November 2020.

On the price front, inflationary pressures intensified again in February. In response to another marked rise in input costs, firms hiked their selling prices at the fastest rate on record.

The seasonally adjusted final IHS Markit US Services PMI Business Activity Index registered 56.5 in February, up notably from 51.2 in January and down only slightly on the earlier released ‘flash’ estimate of 56.7. The steep expansion in service sector business activity was reportedly indicative of stronger demand conditions and a quicker rise in new orders as the Omicron wave of COVID-19 slowed. Although softer than the peaks seen in 2021, the rate of output growth was historically elevated.

Supporting the overall upturn in output was the fastest increase in new business for seven months. Service providers largely attributed the expansion to greater demand from new and existing customers, with some noting an uptick in advanced ordering due to material and labor shortages.

Concurrently, foreign client demand picked up. The rise in new export orders was the steepest since last June and solid overall. Survey respondents reported that easing travel restrictions had aided growth.

Meanwhile, output charges increased at the sharpest pace since data collection began in October 2009. Service sector firms reacted to another substantial hike in cost burdens by passing through greater input prices to customers where possible. The rate of cost inflation accelerated amid higher material, transportation, fuel and labour bills.

Greater new orders led to a steeper upturn in workforce numbers midway through the opening quarter of 2022. Firms were also keen to clear backlogs of work, which continued to expand. The rate of job creation was strong overall and quickened to the sharpest since last May.

Although the rate of growth in backlogs of work eased for the fourth successive month to the slowest since May 2021, it was still quicker than the series trend. Ongoing supply chain disruptions and challenges in hiring and retaining staff stymied efforts to clear outstanding business.

Increased staffing numbers reflected a wider trend of greater optimism among service sector firms during February. The degree of confidence in the outlook regarding output for the coming year was the highest since November 2020. Alongside hopes of further upticks in client demand, companies noted that opportunities for growth are likely to increase following the easing of travel restrictions and the waning impact of the Omicron wave of COVID-19.

The IHS Markit US Composite PMI Output Index posted 55.9 in February, up from January’s Omicron-induced low of 51.1. The latest data signalled a sharp expansion in private sector business activity, as output growth regained momentum at manufacturers and service providers.

Stronger demand conditions at private sector firms led to the fastest upturn in new business since July 2021. Greater new sales were supported by increased foreign client demand, as new export orders rose solidly.

Inflationary pressures remained elevated across the private sector, despite manufacturers recording a slight slowdown in hikes in supplier costs. The rate of charge inflation quickened to a four-month high amid the sharpest rise in service sector output prices on record.

Further expansions in backlogs of work at private sector firms led to a greater impetus to hire new staff. Despite ongoing reports of labor shortages, firms were able to increase workforce numbers at the steepest pace since May 2021.

Chris Williamson, Chief Business Economist at IHS Markit:

(…) February’s PMI surveys are broadly consistent with GDP rising at an annualised rate of 3.5%, representing a substantial improvement on the 0.9% rate signalled by the January surveys. First quarter GDP growth is therefore currently averaging just over 2%.

The relative weakness of February’s global output growth by historical standards contrasted with a more robust expansion of order books recorded during the month. New orders rose to the greatest extent since last October, with the latest new orders index reading of 53.5 running above the pre-pandemic long-run average of 52.6 to signal an above-trend rate of demand growth.

Output growth has in fact now lagged inflows of new orders continually since March of last year, hinting at persistent production constraints which intensified in February.

By far the greatest shortfall of production relative to new orders was seen in the US, followed by Australia, Germany, Ireland, South Korea and Taiwan.

Global manufacturing PMI, output and new orders

Factory price inflation accelerates

The sustained upward pressure on raw material input costs, combined with upward pressure on wages as firms sought to attract and retain workers, led for a renewed upturn in global factory selling price inflation. Prices for goods leaving the factory gate rose in February at the fastest rate since November, registering the fourth-largest monthly increase recorded since comparable data were available in 2009.

Especially strong increases were seen in the US and Europe, although a new high was printed in Asia excluding Japan and China. Japan saw the rate of increase cool only slightly from January’s all-time high. While selling price inflation remained relatively muted in China, reflecting weaker input costs pressures amid government interventions in commodity markets, the rate of increase nevertheless likewise accelerated.

Factory gate price inflation

War Plunges Auto Makers Into New Supply-Chain Crisis The fighting in Ukraine has shut down small but important suppliers to the car industry, closing plants far from the conflict zone, while sanctions and severed trade routes are hindering shipments to and from Russia.

Bank of Canada Governor Tiff Macklem warns of broadening inflation, signals aggressive rate hike path

(…) In a virtual speech to the CFA Society of Canada on Thursday, Mr. Macklem said the central bank has “considerable space” to raise interest rates this year. He added that he is not ruling out a half-percentage-point rate hike at a coming meeting, rather than the typical quarter of a point – something that hasn’t happened since May, 2000. (…)

“For households and businesses that are already feeling the pinch of inflation, the higher cost of borrowing can be doubly painful. But tighter monetary policy is necessary to lower the parts of inflation that are driven by domestic demand,” he said. (…)

He noted with concern that price increases have been broadening in recent months. Two-thirds of the 165 components that make up the consumer price index experienced inflation above 3 per cent in January. (…)

“With slack absorbed and considerable momentum in demand, we need higher interest rates to dampen spending growth so that demand does not run significantly ahead of supply,” he said. (…)

If the price of oil stays around US$110, that could add around a percentage point to inflation this year, he said. On the flip side, higher energy and other commodity prices tend to benefit Canada’s export-oriented economy. That means the central bank will need to balance the positive and negative effects of the commodity price shock when setting monetary policy. (…)

“Roughly 40 per cent of our bond holdings mature within the next two years. This suggests that, other things being equal, our balance sheet would shrink relatively quickly,” he said.

Energy prices will hurt growth in the euro area more than in the US

The repercussions for energy prices are most severe in Europe due to its energy dependency on imports. The US is in comparison energy self-reliant and a net petroleum exporter. Due to this, gas prices in the US have barely moved, while they have shot up in Europe. It is also worth noting that European households spend a higher proportion of their income on heating/gas/electricity compared to American households. Hence, the economic ramifications will be more pronounced for the European economies than in the US. (Nordea)

  

Goldman Sachs:

The key inflation risk for the United States remains higher oil prices. Crude oil prices have risen 20% over the last two weeks to just below our commodity strategists’ $115/bbl near-term forecast, and our inflation rules of thumb suggest this increase will boost core PCE by 7bp and headline PCE by 40bp, if sustained. If oil prices were to rise further to $150/bbl, the boost to core PCE would rise to over 23bp and the boost to headline PCE would rise to over 130bp. We also expect a roughly 0.2pp boost to headline PCE from higher food prices, increased production costs due to rising commodity prices, and increased transport costs due to shipping disruptions, but see clear risks of larger effects from these channels.

The growth drag from oil prices alone is about 0.2pp based on the move so far, but would scale up to over 0.5pp in a $150/bbl scenario.

Although financial conditions have only tightened somewhat since the start of the conflict, we see potentially large downside growth risks if financial conditions tighten significantly, or if tighter sanctions or an escalation in the conflict leads to a broader global slowdown that spills over to the US.

Stephanie Pomboy (@spomboy):

2-10yr curve chart. the last 6 times we were at current levels presaged major economic and/or financial crises. during that time we have NEVER seen a simultaneous increase in oil this fast without recession. i rest my case.

Chinese Property Developers’ Broken Promises Erode Investor Confidence China’s property-bond market remains deeply distressed as real-estate sales fall and investors find it hard to trust developers’ pledges to repay debts.

(…) China’s top 100 developers’ monthly contracted sales volume fell for the eighth straight month in February, plunging 47% from a year earlier, figures from Chinese data provider CRIC showed.

For much of the past five months, the average yield on Chinese developers’ dollar bonds has been above 20%, making it too expensive for most companies to raise fresh funds to pay off maturing debt. To complicate matters, several developers that earlier claimed to have ample liquidity to repay their debts surprised investors by reneging on their statements without warning, damaging bondholders’ already-fragile confidence in the transparency and truthfulness of companies’ disclosures. (…)

Since the beginning of 2021, Chinese developers have defaulted on $8.8 billion of offshore dollar bonds and the equivalent of $5.1 billion of onshore yuan-denominated bonds, dwarfing the total amount of defaulted bonds in previous years, according to Fitch Ratings. (…)

Several other developers also backtracked on plans to redeem their bonds in recent months. Before Evergrande entered into a downward spiral last summer, the property giant had also repeatedly stated that its operations were normal and that it had never missed an interest or principal payment on its dollar bonds. It skipped interest payments in September and defaulted on some offshore debt in December.

Investors have now adopted a “sell first and think later” mentality and are extremely sensitive to rumors, said Iris Chen, a credit analyst at Nomura. The thinking is that even what companies say in regulatory filings doesn’t ensure that the firms will stick to their pledges.

The other big problem is off-balance-sheet liabilities that several developers didn’t disclose earlier to investors or credit-rating companies. The hidden debt has included guarantees on wealth-management products or private loans. (…)

No company can afford to stay in business with monthly sales dropping some 40%, zero external funding, and a wall of looming debts, he said. “The situation in the Chinese property market now is worse than most people predicted at the beginning of the year.”

Count me out of those “most people”. This still looks like an accident happening in slow motion.

Unlike this one…

China’s Bad Ukraine War Xi Jinping has reason to regret cozying up to Vladimir Putin.

The WSJ Editorial Board:

(…) One of the bigger disasters so far concerns the fate of Chinese citizens in Ukraine. Speculation is rampant over whether Mr. Putin warned his Chinese counterpart an invasion was imminent. Either way, Beijing didn’t evacuate its embassy or the Chinese citizens now struggling to escape Mr. Putin’s tanks and bombs.

This exacerbates Mr. Xi’s deeper diplomatic dilemma. Having positioned himself as Mr. Putin’s closest friend, the Chinese leader now is under immense pressure from the rest of the world to talk Mr. Putin out of the war. If he can’t do so, and signs so far aren’t encouraging, it will highlight the limits of last month’s strategic alignment. (…)

Beijing has refused to impose financial or other sanctions of the sort Western governments have placed on Russia. But Chinese companies may have no choice but to comply with the Western sanctions anyway. This is especially true of Chinese banks, which this week found they may need to cut off some business with Russian counterparties to maintain their access to the far more important dollar and euro financial systems. (…)

In Japan, former Prime Minister Shinzo Abe on the weekend became the most senior politician ever to call for Japan to host American nuclear weapons on its soil (…) as the war in Ukraine focuses Asian minds on the security of Taiwan. (…)

One lesson the West should learn from events in Ukraine is the importance of selling defensive weapons early and often to endangered smaller partners. Mr. Xi’s pal in the Kremlin may trigger a new round of weapons sales to Taipei. (…)

The sanctions triggered by Mr. Putin’s warmongering threaten to halt traffic on the railway from China to Europe—a centerpiece of Beijing’s economic diplomacy with Eastern European countries such as Poland.

It’s common outside of China to assume that the Communist Party regime plays multidimensional chess while the rest of the world plays checkers. Perhaps not this time, where what was supposed to be a major strategic friendship is hurting Mr. Xi’s interests barely a month after the ink dried.

• Swedish Poll Shows Majority Backs Joining NATO for First Time Russia’s invasion of Ukraine has shifted opinion.

(…) The development in Sweden mirrors that in Finland, its closest ally. Finnish opinion polls also show that a majority supports membership. Russia has warned that Finland and Sweden joining NATO would have military and political repercussions. (…)

Geopolitical Futures has much more on this here.

• Why China’s Banks Won’t Come to Russia’s Rescue The risk of additional sanctions deters Chinese lenders, while a fledgling payment network relies on the Swift global system

(…) Just over a third of Russia’s exports to China were settled in dollars as of last September, the most recent data available shows, down from 96% in 2013. A little more than half of China’s exports the other way were settled in dollars, down from 90% in 2013. (…)

The first problem is that Chinese financial institutions have been less keen on the idea of banking Russian clients than their political leaders are. (…)

Another major headache is a 2017 law that allows the U.S. to penalize foreign entities that trade with sanctioned companies, countries and individuals. For any bank that wants to be able to transact in dollars, the consequences could be drastic. (…)

Due to the broad Western actions, “there’s now less room for Chinese companies and financial institutions to be doing business with Russian counterparts,” he said. (…)

Any bank using CIPS [China’s Cross-Border Interbank Payment System] to circumvent Swift would also face the risk of secondary sanctions, said Nicholas Turner, a lawyer at Steptoe & Johnson LLP. “A secondary sanction applies to pretty ordinary commercial activity,” he said. (…)

“It’s very easy to create a lot of single-purpose banks just to engage in sanction evading activities to help China’s friends,” said Prof. Chen. “If the conflict in Ukraine lasts for a few years, a number of such small single-purpose banks could be created as vehicles.” (…)

If Russian Currency Reserves Aren’t Really Money, the World Is in for a Shock Sanctions have shown that currency reserves accumulated by central banks can be taken away. With China taking note, this may reshape geopolitics, economic management and even the international role of the U.S. dollar.

(…) In a world in which accumulating foreign assets is seen as risky, military and economic blocs are set to drift farther apart.

After Moscow attacked Ukraine last week, the U.S. and its allies shut off the Russian central bank’s access to most of its $630 billion of foreign reserves. Weaponizing the monetary system against a Group-of-20 country will have lasting repercussions. (…)

While central banks have lately sought to buy and repatriate gold, it only makes up 13% of their assets. Foreign currencies are 78%. The rest is positions at the IMF and Special Drawing Rights, or SDR—an IMF-created claim on hard currencies.

Many economists have long equated this money to savings in a piggy bank, which in turn correspond to investments made abroad in the real economy. (…)

Barring gold, these assets are someone else’s liability—someone who can just decide they are worth nothing. (…)

Indeed, the case levied against China’s attempts to internationalize the renminbi has been that, unlike the dollar, access to it is always at risk of being revoked by political considerations. It is now apparent that, to a point, this is true of all currencies. (…)

Even nations that aren’t sanctioned may want to diversify their geopolitical risk. It seems set to further the deglobalization trend and entrench two separate spheres of technological, monetary and military power. (…)

What can investors do? For once, the old trope may not be ill advised: buy gold. Many of the world’s central banks will surely be doing it.