Monday, February 8, 2016

Payrolls soft, rising labour costs

After another batch of generally soft US data during last week all eyes were on Friday’s payrolls data, particularly for hints about the next move in US interest rates.  As it turned out the signals were mixed.

Employment growth was +151k in the month, lower than expected and a noticeable slowdown from the stellar pace of jobs growth in the fourth quarter of last year that saw payrolls expand at an average +279k per month.  The question is how much of this is genuine slowdown and how much is seasonal.

The detail had some quirks and didn’t help clarify the story much.  While I don't buy the US recession story, the economy is a story of two parts.   Manufacturing is the sector closest to recession for all the reasons we’ve discussed before, yet manufacturing jobs rose +29k in the month.  Jobs growth in the service sector was +118k, still strong but weaker than late last year and consistent with the drop in the services PMI employment sub-index seen earlier in the week.

The unemployment rate ticked lower to 4.9% despite a move higher in the participation rate.  We’ve been expecting to see some cyclical pick up in the participation rate which would likely moderate further declines in the unemployment rate, but such was the strength of employment growth in the household survey that unemployment ticked lower regardless.

Some bounce had been expected in wages following a flat December month. Average hourly earnings were up 0.5% in the January month and 2.5% in the year.  This combined with last week’s poor productivity growth (+0.3% for calendar 2015) will have the FOMC’s cost-push models suggesting higher interest rate are warranted.

 But some of the activity indicators have been undeniably soft.  I still think a good part of the weakness we have seen recently will prove transitory.  I liked the blip higher in the “new orders” component of manufacturing PMI and I think the weakness in the non-manufacturing survey is largely related to poor core retail sales growth at the end of last year that was in part due to the good weather and poor clothing sales.

How the Committee balances concerns about growth with concerns about inflation is key to the outlook for interest rates.   Right now the pace of growth in jobs and unit labour costs are consistent with a more gradual pace of rate hikes than the four indicated by the FOMC (which we always though would be too aggressive), but more than the none indicated by the market.  

Wednesday, February 3, 2016

Sharp fall in the New Zealand unemployment rate

The labour market bounced back strongly at the end of 2015.  Employment rose +0.9% in the December quarter, coming back strongly from the surprise -0.5% dip in the September quarter.  Annual employment growth came in at 1.4% for the calendar year.

The surprise came with a sharp fall in the unemployment rate from 6.0% in September to 5.3% in December.  Despite another strong increase in the working age population, the participation rate recorded its third consecutive quarterly decline to 68.4, down from 68.7 in September and 69.5 at the start of 2015.  The latest level is still high by historical and international standards – it’s just not as high as it was.

Wage inflation remained muted. In fact the annual rate of increase in private sector ordinary time labour costs continued its drift lower, coming in at 1.6% for the year.

This mix of data doesn’t make the Reserve Bank’s job any easier.  This result along with the bounce back in GDP growth tells us the New Zealand economy ended 2015 in better shape than it started it, but with subdued domestic inflationary pressures.   

Having lowered the OCR back to the historical low of 2.5%, we expect the Bank to hold fire on further rate cuts in the near term, but retain a bias to reduce interest rates further should conditions warrant.

Monday, February 1, 2016

Don't fret about US growth

It has been an angst-ridden start to the year with concerns about global growth the major cause of all the consternation.  For those of you who have read the latest edition of QSO, you already know we think those concerns are largely overdone.  Fourth quarter 2015 US GDP data released last week didn’t help alleviate those concerns, but there was nothing in that report to alter our view that the US economy will enjoy a third consecutive year of above trend growth of 2.0-2.5% in 2016.

Much of the weakness in the low quarterly (annualised) result of +0.7% was for reasons that were well-flagged and that will ultimately prove to be transitory.  Inventories provided a second consecutive quarterly drag on growth while net exports shaved 0.5% off growth in the quarter. Business investment was flat over the quarter but that as largely due to weakness in “petroleum extraction structures” (i.e. rigs), outside of which investment remained solid.

On a more positive note consumer spending was solid (+2.2%) over the quarter, despite the drag from utilities spending given the unseasonably warm weather over the quarter.  Also residential investment (+8.1%) continues to benefit from the increase in household formations and still low mortgage interest rates.

But we don’t completely dismiss the weakness in the economy at the end of last year.  The best indicator of what you might call “core growth” is real final sales to domestic purchasers which came in at an annualised rate of 1.6% in the fourth quarter, down from 2.9% in the third quarter. 

Right now our view is for continued above trend GDP growth of 2.0-2.5% in 2016.  A combination of solid jobs growth, increases in the average working week along with modest wage growth is expected to lead to continued solid gains in aggregate labour income and consumer spending.   Our read of the forward looking labour market indicators remain consistent with this story.  Furthermore we also believe we haven’t yet seen the full benefit of the real income gains that have come from weaker oil prices. 

The biggest risk to our view is weaker than expected jobs growth and any deterioration in the recent trend improvement in consumer confidence.  The weather also appears likely to cause disruption again in the early part of the year.  We will be watching that data closely in the weeks and months ahead.

No doubt the FOMC will also be watching closely.  The Committee’s “dot plot” forecast suggests four hikes this year.  We have been assuming three but acknowledge the risk is biased to less rather than more.  The latest data and market volatility suggests the pause may come earlier than we thought.  Markets are pricing in only a 14% chance of a hike in March which doesn’t seem unreasonable right now.  The Committee will need to see firm evidence the growth weakness at the end of last year is indeed temporary.

Tuesday, January 19, 2016

Further modest slowdown in China

China December data on balance reinforces the story of gradual slowdown with policy support moderating the pace of the slowdown.  There is nothing in this set of data to change our view that fears of a hard-landing are overdone.

GDP for the year came in at 6.8% yoy with the annual average at 6.9%.   That’s just below the 2015 target of 7% and above the new target of 6.5% per annum in the 13th Five Year Plan.  The nominal data shows that growth in primary industries were weak over the quarter with secondary sectors (manufacturing, construction) stabilising at a low level with tertiary sector activity (services) remaining the strongest performing sector.

December month activity data showed a further slowdown in industrial production to 5.9% in December with retail sales also slowing to 11.1% in December from 11.2% in November.  Fixed asset investment was also lower than expected, largely due to lower infrastructure investment.  On a positive note real estate investment improved (to less negative) in December.  While house prices have been recovering recently our expectation was that investment activity would remain weak given the still significant oversupply, especially in Tier 2 and 3 cities.

Recovery in property prices has been a key part of our expectation of a soft landing in China.  Property is a far more significant proportion of household wealth than shares.  What happens in the housing market is far more critical for consumer confidence and household spending than the volatility in the share market.

Today’s data comes after last week’s better than expected trade data.  While it could be the case we are near the bottom in the global trade cycle, it's too early to expect a recovery.  Global inventories remain too high to expect any significant pick-up in trading activity any time soon.   Over-invoicing may also have played a part in the result.

Money and credit data was also released last week and while weaker than expected, money supply and credit growth are supportive of the economy generally.  That said financial conditions remain relatively tight with real interest rates still too high.  Further monetary easing is likely in the form of interest rate reductions and cuts in the required reserve ratio.

We still don’t think we’ve seen the full impact of prior efforts to stimulate the economy.  Interest rate cuts, new projects, new subsidies and tax cuts all take time to have an impact but all add up to a significant effort to support the economy.

But its important to remember this is not about restoring old levels of growth.  It's about managing the pace of the slowdown during an important yet challenging rebalancing of the economy to what will ultimately prove to be lower but more sustainable rates of growth in the future.  While there will be fall-out and missteps along that way it will be good for both China and the global growth.  We continue to expect 6.5% growth in China in 2016.

For more on the recent ructions in markets, click here  for a commentary from our Head of Investment Strategy Keith Poore.