Employment Costs Report Complicates Interest Rate Outlook

Economic data

- (IT) Italy Jun PPI M/M: -0.2% v +0.2% prior; Y/Y: -2.3% v -2.7% prior
- (MY) Malaysia Jun M3 Money Supply Y/Y: 6.0% v 5.7% prior
- (RU) Russia Central Bank (CBR) cuts 1-Week Auction Rate by 50bps to 11.00%, as expected
- (PL) Poland Central Bank (NBP) July Inflation Expectations Survey: 0.2% v 0.2%e
- (ZA) South Africa Jun Trade Balance (ZAR): 5.8B v 4.0Be
- (CL) Chile Jun Unemployment Rate: 6.5% v 6.7%e
- (US) Q2 Employment Cost Index: 0.2% v 0.6%e
- (CA) Canada May GDP M/M: -0.2% v 0.0%e; Y/Y: 0.5% v 0.8%e
- (BE) Belgium Q2 Preliminary GDP Q/Q: 0.4% v 0.3% prior; Y/Y: 1.3% v 1.0% prior
- (US) July ISM Milwaukee: 47.12 v 50.00e
- (BR) Brazil Jun Budget Balance (BRL): -9.3B v -5.4Be; Nominal Budget Balance: -36.6 v -59.8B prior
- (US) July Chicago Purchasing Manager: 54.7 v 50.8e
- (US) July Final University of Michigan Confidence: 93.1 v 94.0e

US equities are seeing more modest gains this morning despite some concerns about the Q2 employment cost index report and a move lower in sovereign yields. The 10-year UST has come in six basis points to trade below 2.2% for the first time since early July. As of writing, the DJIA is up 0.07%, the S&P500 is up 0.23% and the Nasdaq is up 0.39%.

The Q2 employment cost index report out this morning indicated that labor costs decelerated sharply in the quarter (+0.2% v +0.6%e), reversing Q1's +0.7% figure and delivering the lowest rate of growth in 30 years. The Q1 reading suggested wage growth had picked up perceptibly from the stagnant trend of earlier years, holding out the hope for accelerating inflation and spending, with obvious implications for monetary policy. Analysts noted that some of the slowdown could be a reversal of a seasonal effect: the uptick in the first Q1 was concentrated in incentive-pay occupations, where bonuses and commissions can be volatile, and this pop reversed itself in the second quarter. Analysts caution that the adjusted data also rose in Q1 and decelerated in Q2.

The dollar has seen some big moves in the wake of the ECI report. EUR/USD was pivoting around 1.0945 earlier in the European session but then rocketed up more than one big figure to 1.1110 in the wake of the data. USD/JPY rose from around 124 to 124.36 before dropping sharply to 123.56. Both pairs have returned to the levels where they started the day. WTI and Brent crude are both back around multi-month lows after brief moves higher on the dollar softness. In fixed income markets, the short end had been selling off as investors had begun getting comfortable with a potential September Fed rate hike and moving into the long end of the curve. That trend reversed rapidly with ECI.

Both Exxon and Chevron missed earnings expectations in the June quarter. Exxon's profits fell by 50% y/y while Chevron's slump was even more pronounced given a host of one-time charges. Surging profits at the majors' downstream operations, which benefit from lower crude prices, did not make up for the collapse in upstream operations from the slump in prices. Shares of XOM and CVX bottomed out around -4.5% a piece and buyers have begun stepping in.

Shares of American Axle had gained more than 4% in the premarket after reporting decent profit and revenue growth in its second-quarter report. The firm also named a new CFO. AXL has given up gains and dropped more than 4% after cutting its FY revenue guidance on the conference call. Seagate has also given up early gains and hit -1.7% on disclosing weak forward guidance on the conference call. Royal Caribbean is up more than 8% on a strong Q2 showing and a guidance increase. The firm said bookings are running well ahead of last year at higher prices, with improvements in the Caribbean continuing at a robust pace. CCL and NCLH are up about 4% each in sympathy.

Looking Ahead

- 13:00 (US) Weekly Baker Hughes Rig Count
- 15:00 (CO) Colombia Central Bank Interest Rate Decision: Expected to leave Overnight Lending Rate unchanged at 4.50%
- 16:00 (AR) Argentina Jun Construction Activity M/M: No est v -4.2% prior; Y/Y: no est v 3.8% prior
- 20:00 (KR) South Korea July Trade Balance: $6.8Be v $10.2B prior; Exports Y/Y: -6.8%e v -1.8% prior; Imports Y/Y: -15.7%e v -13.6% prior
- 21:00 (CN) China July Manufacturing PMI: 50.1e v 50.2 prior; Non-manufacturing PMI: No est v 53.8 prior