Previous Week

  • US: Labor market recovery continues at a slow pace
    June’s employment report illustrated that private sector hiring continues to firm, but at a slow pace. As was expected, total payrolls dropped 125K due to the release of 225K temporary census workers. Excluding the Census workers, total payrolls rose by 100K with 83K of them from the private sector. This is an improvement compared to May, which only created 33K private sector jobs. In sum, the economy has generated 593K private sector jobs in 2010. Even though total payrolls fell, the unemployment rate improved to 9.5% from 9.7% due to a drop in the labor force participation rate to 64.7%, the lowest level since January. In fact, the civilian labor force dropped by 652K people in June. As a result, the unemployment rate could rise again if the participation rate improves in upcoming months. The private sector is expected to continue to hire, but at a slow pace. Even though businesses’ financial situation has improved, companies continue to take advantage of productivity gains and remain hesitant to hire. Nevertheless, total payrolls may drop further in the next few months as the remaining 300K Census workers are let go. The slow pace of the labor market recovery will limit the pace of consumer spending and the recovery of consumer confidence.
  • EU: ECB’s liquidity policies and the implication for Eonia
    The ECB announced this week the results of the June’s 3M LTRO with full allotment. The funds allotted were €132 bn, with a total number of bidding institutions of 171. The amount is clearly more than what had been given in recent auctions, but is still less than 1/3 of the €442bn that also expired this week. The implication for EONIA and short-term liquidity conditions in the Euro area will primarily depend on how much liquidity will remain in the system after this week’s maturity. Since the fall in liquidity (around € 170bn) matches the average use of the deposit facility (€ 170bn) since July 2009, this result suggests that almost all the extra-liquidity that was available during the last year will disappear as consequence of this week’s maturity. This corroborates our view that the 12-month maturity could press Eonia upwards fairly quickly towards 1%. Nonetheless, as sovereign debt concerns maintain a strong hoarding motive in bank’s liquidity policies we do not expect this impact to be immediate.
  • LATAM: Strong credit growth in LATAM points to further monetary tightening
    Recent data from Brazil and Peru showed that bank credit is growing at an impressive pace and fuelling strong growth in the whole region. The outstanding loans in Brazil’s banking system rose by 2.1% m/m in May. In Peru, last month’s data also showed strong credit growth after reaching the highest level since October 2008 (+10% y/y), supported by very favorable economic and financial conditions. This flow of funds is putting additional pressure to domestic central banks for further tightening. In fact, the Brazilian Central Bank has recently announced it will gradually elevate it reserve requirement ratio (RRR) from 42% to 45% in an attempt to curb economic growth and control inflation expectations. The adjustment in RRR and other monetary measures are in line with our view that regional policy makers will try to make use of different tools, but risks would tilt to earlier hikes if surprises in activity and credit continue.

Week Ahead


ISM Non-Manufacturing (June, Tuesday 10:00 ET)

Forecast: 55.6 Consensus: 55.0 Previous: 55.4

Non-manufacturing economic activity will expand for the fifth consecutive month in June, but at the same pace as the prior three months. While expansion is a good sign for employment, the stagnant pace supports our expectation of a slow job market recovery. A negative surprise in this index could indicate that the pace of economic expansion is slowing, which would limit the pace of job growth even further.


Initial Jobless Claims (w/e June 25, Thursday 8:30 ET)

Forecast: 457K Consensus: 460K Previous: 472K

Initial jobless claims have been fluctuating around an average of 464K over the past eight weeks. The stagnation is illustrative of the weakness that remains in the job market and of its slow pace of recovery. Even though business’ financial situation has improved, they are continuing to take advantage of productivity gains and remain hesitant to hire due to the uncertain economic outlook. Confidence in the employment outlook is the key to accelerate the growth rate of consumer spending; however, this week’s initial jobless claims data will show that hiring remains meek.


Consumer Credit (May, Thursday 15:00 ET)

Forecast: -$1.9B Consensus: -$2.0B Previous: $1.0B

Consumer credit outstanding is expected to have declined further in April, yet the overall pace should slow. This is a lagged indicator that does not have a large market impact. Nevertheless, the ongoing decline, particularly in revolving credit, highlights the frugal mentality of the consumer, who is still spending cautiously. A negative surprise in this front could indicate that the pace of recovery of consumer spending will be limited by lack of the use of credit.


Wholesale Inventories (May, Friday 10:00 ET)

Forecast: 0.4% Consensus: 0.4% Previous: 0.4%

Wholesale inventories are expected to rise for the fifth consecutive month, indicating that the inventory restocking process continues. Furthermore, the inventory to sales ratio will remain low, which is a sign that the restocking process is not yet near the end. As a result, inventories are expected to have another significant positive impact on economic growth in the second quarter. In addition, they remain an important driver of industrial production.


Market Impact

None of this week’s indicators are significant market movers individually. However, negative surprises on all fronts could point to a slowdown in economic growth. Consumer credit and initial jobless claims are indicative of consumer spending, which is essential for healthy economic growth. Additionally, even though the manufacturing sector is leading the economic recovery, the services sector is leading the labor market recovery. As a result, slower growth in the non-manufacturing sector could mean fewer new jobs.