Daily Brief

June U.S Payroll report exceeds on the headline

But not everything was strong

The latest U.S labor market report (June), came out much stronger than expected on the headline, with 372k gains against roughly 270k forecast, at the tail-end of last week. The overall unemployment rate remained steady at 3.6%. Whilst the headline was strong, the latest participation* rate dipped slightly to 62.2% from 62.3%. Furthermore, average hourly earnings also dipped to 5.1% from 5.3%, which means that annual earnings are now currently running at around 3.5% less than annual inflation, which will be leaving a rather unwanted gap in the wallets of the average U.S consumer.

Markets had a positive close

Given the obvious and continued strength in much of the U.S labor market, the Fed are not likely to be distracted from their task in attempting to reign in inflation through aggressive rate hikes. Expectations of another 75bps move toward the end of this month will therefore not likely have been diminished in any way by anything that they saw in that Labor report. Perhaps the biggest surprise was the market reaction, and after a slight stumble, markets closed the week maintaining recent gains, with the major U.S indexes closing the day in positive territory. The dollar continued its mini consolidation, with the dollar index (DXY) at around 106.50, roughly 100pips lower than the cycle top set earlier in the day. GBP/USD finished the week above 1.2000, albeit just, and EUR/USD nearly made it back up to 1.0200, having got within a tantalising 72pips of the magic parity (1.0000) region earlier in the day. The start to the new week has seen investor worries resurface, with escalating worries over fresh COVID-related lockdowns in Shanghai, sagging confidence in Asia and driving the major indexes lower once again.

Canadian jobs weaken

There was some rather unexpected weakness in the Canadian labor market, with the June report registering 43.2k job declines, against expectations of 39.8k gains. Despite this, the overall unemployment rate dropped to 4.9%, (from 5.1%) – which is an all-time low. This was due to the fact that fewer people were looking for work. Much the same as in many countries just now, Canada is also suffering from many unfilled vacancies in the service sector post-COVID. Furthermore, average hourly wages increased above expectations at 5.57%, which is also helping to highlight a particularly tight Canadian labor market. USD/CAD dropped back under 1.3000, closing the week at 1.2940, in-line with weakness for the greenback across the board.  On Wednesday, the BoC are still very much expected to raise Canadian interest rates by a Fed-matching 75bps, and there has been nothing overly concerning in recent economic data to diminish market expectations.

Inflation is the key

The latest U.S inflation report (Wednesday) will be the key release for markets this week, followed closely by Friday’s U.S Retail Sales. Total U.S inflation may have pushed higher during June, with the annual gains rising from 8.6% to 8.7%, according to the latest analyst estimates. However, if we take food and energy out of the mix, there is a chance that the ‘Core’ number could drop on an annual basis, from 6% to 5.7%. As we have said beforehand, where the consumer can have an impact, such as in auto sales and high value ticket items, there are signs of a slight weakening, which is to be expected. That could also be reflected in a softening of Retail Sales when they come out two days after.  

What else are we looking at this week?

On the central bank side, and aside from the BoC, we also fully expect the RBNZ to follow the likes of the RBA, and raise New Zealand interest rates by another 50bps later this week. German inflation is expected to remain above 8% (YoY). Australian Jobs and Chinese GDP are all worthy of a mention. In the UK, the race to be the next Tory party leader and therefore prime minister, will accelerate this week, with many of the ‘usual’ suspects already throwing their names into the hat.

*The participation rate is the total number of people who are currently employed, and those actively looking for a job. So, in effect the participation rate is the total market of ‘active’ people, based as a percentage of the available workforce over 16 years old.

 

What else is happening today?

USD - Fed’s Williams speech

NZD – REINZ House Price Index, Visitor Arrivals

GBP – BRC Like-For-Like Retail Sales

JPY – Producer Price index

 

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