Monday, January 11, 2016

US jobs helps soothe concerns over global growth, but the Renminbi is key to stability

Strong US jobs growth in December went some towards settling share markets towards the end of last week following a few days of general angsting over global growth with a few geo-political concerns thrown in for good measure. But right now the immediate outlook for the Renminbi remains key to stability in  markets.

Non-farm employment rose a better-than-solid +292k in December.  Positive revisions of +50k to prior months added to the positive story.  Strength was centered in the service sectors and construction, with the latter probably helped by good weather.

The unemployment rate was unchanged at 5.0% as the participation rate nudged higher to 62.6%.  Average hourly earnings were flat over the month but the annual rate rose to 2.5% as a negative monthly decline in December 2014 fell out of the annual calculation.  The reverse happens next month as a +0.6% falls out in January.  Looking through the volatility annual wage growth seems to be consolidating at a level just over 2%, which won’t be causing the Fed any sleepless nights.

This result reinforces our view of consumer rather than production-led growth momentum in the US economy.  Last week’s weak ISM manufacturing survey confirmed the sector continues to grapple with energy-related weakness, the higher US dollar and only modest global; growth.  We expect those factors will continue to be a drag on US industrial production and capital spending for some time.

So the US consumer remains key to our view of continued above trend GDP growth in 2016.  A combination of continued jobs growth, increases in the average working week along with modest wage growth is expected to lead to solid gains in aggregate labour income and consumer spending.

But right now global growth concerns remain centered on China.  The latest fall in Chinese shares looks to have been exaggerated and driven more by fears and regulatory issues around the share market and currency rather than a renewed deterioration in economic indicators.

While the Caixin business conditions PMIs were weaker in the last week official PMIs for December were stronger (see post below). Rather the main drivers were worries about new share supply following the scheduled end to a ban on selling by major shareholders, a new share market circuit breaker that commenced on Monday which appears to have added to market volatility rather than calmed it down and a continuing depreciation of the Renminbi.

Looking at each of these: Chinese regulators have since announced a restrictive limit on the size of stakes that major investors can sell; the circuit breaker has now been suspended after the experience of the last week; and after a 6% plus depreciation in the value of the RMB since July the PBoC is now likely to step up efforts to try and stabilise it again much as it did through September and October.

The depreciation of the Renminbi is the key issue at present as its decline is helping fuel upwards pressure on the US dollar, adding to weakness in oil and other commodity prices and contributing to fears of some sort of emerging market crisis, fears that we don’t share.  As the week ended we saw some stability return to the Chinese share market and currency but it needs to be sustained.