Week in review: US payrolls disappoints consensus, September hike likely

Week in review

Canada – Real GDP shrank 0.1% in April after contracting 0.2% in March. Goods-producing industries saw output drop 0.8%, as declines in construction, mining and oil and gas extraction, manufacturing and utilities more than offset an increase in agriculture. Industrial production fell 1.2% as a result. Service sector output rose 0.3%, with gains in accommodation and food services, wholesale trade, real estate, and professional services outweighing losses in retail trade, finance and insurance, and arts and recreation. April’s retreat was the fourth monthly in a row, marking the worst GDP streak since the recession. The goods-producing sector was the main drag on growth, receding for the fifth time in six months. So far in Q2, the sector is down already an annualized 7.2%, its largest pull-back since the 2008-2009 recession. Weakness was not confined to mining alone, as construction slid back for a sixth consecutive month. On the plus side, services posted their largest monthly advance in four months. Nevertheless, we can expect below-potential growth in Q2 in light of the poor handoff from Q1 and high inventory levels. Though some analysts already see Canada slipping into recession, we do not believe the economic underperformance will be deep enough, last long enough and affect enough sectors of the economy to clear that bar. Militating against the spectre of recession is the fact that employment was very strong in May, as were auto sales and home starts. Moreover, with full-time jobs at a record high and disposable income to be boosted by the July retroactive payments of the Universal Child Care Benefit (equivalent to 0.7% of GDP), consumption spending should bounce back. Exports should fare better as well, in sync with a resurgent U.S. economy. Consequently, despite the growth slowdown in H1, we still expect abovepotential GDP growth in H2.

In May, the Industrial Product Price Index rose 0.5% month over month but slid 1.3% year over year, reflecting lower prices for energy and petroleum products (-21.2%). Excluding these two components, the IPPI was up 2.7% from 12 months earlier. Also in May, the Raw Materials Price Index jumped 4.4% on a monthly basis but sank 17.0% year over year.

United States – Nonfarm payrolls grew 223K in June, short of the 233K increase expected by consensus. Moreover, 60K jobs were trimmed from prior-month figures to reflect more complete data. The private sector added 223K jobs in June. Employment in the goods sector was essentially unchanged (+1K), with modest gains in manufacturing (+4K) counterbalancing a small loss in mining (-4K), and construction and logging holding steady. The private service sector created 222K net jobs, with decent gains in retail trade, professional and business services, education and health services, and administrative and waste services. Government employment remained unchanged. The unemployment rate slipped two ticks to 5.3% (its lowest mark in seven years) on the back of a three-tick decline in the participation rate. Despite a decent headline number for payroll jobs, hourly earnings were flat on the month and full-time employment sagged (-349K), supplying ammunition to members of the FOMC who would like to push back the interest rate liftoff. This said, it should be noted that the Conference Board’s leading economic indicator released two weeks ago showed growth of 7% annualized over the past three months. Such a number is normally associated with real GDP growth in the range of 4% to 5%. If historical relationships hold, the labour market should begin to grow strong again and full-time jobs should hit a new record high by the end of the summer. For the data-dependent Federal Reserve, it will be hard not to go through with a rate hike, provided the European situation does not deteriorate. Under the circumstances, liftoff in September still looks quite likely to us, though the view is not widely shared at this point in time. Indeed, the fixed-income market is pricing a later start to the FOMC policy normalization process.

The Institute for Supply Management Factory Index rose to 53.5 in June from 52.8 the month before. All in all, the report suggested manufacturing was picking up, as gains in the employment (55.5) and new orders (56.0) components, coupled with the fact that production was still in expansion territory (54.0), contributed to offset weakness in exports (49.5).

Factory orders fell 1.0% in May. Orders for nondefense capital goods excluding aircraft were revised down in both April (-0.7%) and May (-0.4%). Manufacturers’ shipments fell 0.1% in the month but inventories were unchanged in May. The inventories to shipments ratio remained unchanged at 1.35.

The Conference Board U.S. Consumer Confidence Index rose to 101.4 in June from a downwardly revised print of 94.6 the prior month. The improved sentiment was due to perceptions about the present situation (sub-index up to 111.6) and consumers being more confident about economic prospects (sub-index up to 94.6). Consumers were more optimistic than in the previous month about prospects for business conditions while income expectations declined slightly. They were more enthusiastic than the previous month about buying autos but less so about buying major appliances (home purchases remained unchanged).

On a separate note, the Case-Shiller 20-City Home Price Index climbed 0.30% in April on a seasonally adjusted basis, extending its uptrend to eight straight months. Year over year, however, the index dipped from a revised 4.96% in March to 4.91%, still 12.9 percentage points below its all-time high reached nine years earlier (seasonally adjusted). However, on a three-month annualized basis (seasonally adjusted), the 20- city index was growing at a whopping pace of 10.2%. San Francisco led the pack with three-month annualized gains of 22.1%, while Cleveland brought up the rear with a 0.7% decrease.

In May, pending home sales progressed 0.9% after springing a downwardly revised 2.7% in April. This was the fifth consecutive month of increases, leaving the year-over-year growth rate at 8.3%, compared with 12.6% previously. On a month-over-month basis, sales increased in the Northeast and West but declined in the Midwest and South.

Construction spending was up 0.8% in May after advancing 2.1% in April. Private-sector residential construction jumped 0.3% reflecting a 0.2% gain in multi-family units while single family construction was flat in the month. Total non-residential construction climbed 1.1% as private non-residential outlays sprang 1.5%.

Vehicles sales declined in June to a 17.11 million unit pace (seasonally adjusted annual rate) from 17.2 million in the previous month.

World – In China, the June HSBC manufacturing PMI was revised down two ticks to 49.4. The official PMI was reported at 50.2 and the non-manufacturing index fared better with a 0.6- point gain to 53.8.

In the Eurozone, the June HICP slipped to 0.2% y/y from 0.3% y/y and May unemployment held steady at 11.1%, as expected. The European Commission reported that the economic confidence index fell from 103.8 in May to 103.5 in June. More importantly, all eyes will be riveted on this weekend’s referendum in Greece.