Greece’s hapless Finance Minister Venizelos confirmed earlier what was already widely expected, namely that the depth of the recession in his country this year will be much worse than expected (down an extraordinary 5%). As a result, Greece’s fiscal deficit will probably widen this year, to around 9% of GDP, well above the target of 7.6%. Upon learning that the Greek situation was much worse, Les Echos reported that a meeting between Greek officials and the ECB/IMF/EC had been postponed. Greece’s Finance Minister stated that progress on implementing structural reforms needed to take place more quickly. Unfortunately for Greece, this news comes at a terrible time, as a number of Eurozone countries are becoming increasingly uncomfortable with endorsing the second bailout package. In Finland, a poll undertaken by a major business magazine found that 49% rejected their country’s participation in the next Greek bailout, while only 34% were in support.
The headline payrolls numbers showed that job growth stalled in the US during August, but as always there are a pile of caveats and different interpretations to the US employment report. The main one is the fact that the Verizon strike removed 45k from headline payrolls. If we look at the household survey, employment grew by 331k, with the unemployment rate steady at 9.1%. The other stand-out was the tick higher in both the participation rate (those working or looking for work as proportion of working age population) given that this has been on a declining trend through the recession and also the subsequent recovery. This is perhaps the only positive from what is a fairly weak set of data, but given the overwhelming downward trend here, it probably pays not to get too excited by it for the time being. For those still in employment, average hours worked have been steady or falling since April, with average hourly earnings rising by 1.9%, which sits exactly on the average of the past year and slightly below the average of the past six months. In other words, the outlook for those in work is also deteriorating.
But the pattern of the numbers should not be that surprising given the recent data we’ve see on real sector activity and also from leading indicators. The overall pace of job creation remains woefully short of that seen during previous recessions and is at a pace that will take the US economy until 2017 just to reach the pre-recession level of overall employment, even before taking into account the labour force growth that will have taken place since. If the US manages to escape a double-dip recession, the outlook remains for years of sub-par growth and constrained consumer spending, which fits with the payback times normally associated with balance sheet recessions.
There’s a frustration on the part of some market participants that there is always such a strong focus on the US employment report, given that the labour market is a lagging indicator of economic fortunes. Nevertheless, the fact that the labour market has been lagging the recovery of the past two years has been the primary issue, with total employment still way below the pre-recession peak of 2008 and the participation rate (those in work or looking) still on a declining trend. For an economy that desperately needs tax revenues and consumers to spend (out of income, rather than borrowing), this has been a thorn in the side of the recovery to date. Furthermore, today’s anticipated 68k gain on headline payrolls falls far short of that required to account for the growth in the labour force. A negative headline number will once again increase speculation that the US economy is headed for another recession.
Commentary
Eurozone PMIs further fuelling the slowdown story. The final manufacturing PMI data for the eurozone was revised lower from the preliminary reading, taking the series down to 49.0, from 49.7 previously. Downward revisions of both Germany and Italy were primarily responsible, whilst the big stand-out is what we are seeing with export orders, with the German export orders balance the lowest in the eurozone. This comes on the back of the breakdown of Q2 German GDP data, which showed net exports subtracting 0.3% from headline growth. It’s a disquieting development, given that the German export sector has been one of the few bright spots on the eurozone economic front during the recovery phase. The manufacturing PMI series has declined every month since the first rate increase from the ECB back in April. At the time, Trichet commented that: “Euro area exports should be supported by the ongoing recovery in the world economy”, and also added that: “Recent economic data confirm that the underlying momentum of economic activity continues to be positive”. Both statements have been comprehensively overtaken by events and, whilst the expansion of liquidity provision and also the re-opening of the bond buying program have provided some offset, neither are strictly monetary policy tools. The case for an about-turn on ECB policy is growing, but Trichet is unlikely to be the man to deliver it with markets having to wait until his predecessor takes over (from November).
MOF spends big to prevent yen strength. Apparently the Japanese MOF’s determination to prevent the currency from strengthening much further is greater than many had expected. According to a statement released this week, the BOJ sold JPY 4.51trln (USD 59bln) in the forex market last month, by far the largest intervention for over seven years. Given the enormous size of this intervention, the question which begs to be answered is why the currency is not much weaker. USD/JPY for instance is not far away from its record low. Indeed, the MOF must be extremely frustrated by the lack of price response to its industrial-scale intervention. Its irritation is not dissimilar to that of the SNB, which also seems at a loss to counter the extraordinary strength of the Swiss franc. Such is the incredible volume of capital flows seeking safe havens that some central banks are essentially swimming against a financial rip-tide in attempting to thwart these massive shifts. For now, it seems an utterly fruitless exercise.
Diminished hope for a rate cut down under. After much excitement a couple of weeks ago that the RBA might actually cut rates before year-end, developments since then have effectively scuppered this prospect, at least for the near-term. Firstly there was last week’s parliamentary testimony from RBA Governor Glenn Stevens, during which he warned that inflation required careful watching. Secondly, data this week suggested the economy still has decent momentum; retail sales rose by 0.5% in July after a slight 0.1% decline in the previous month, while business investment rose by nearly 5% in the second quarter. The latter remains a real success story down under, with a very strong pipeline of capital expenditure, especially in the resource and energy sectors. Finally, the marginal lift in China’s PMI last month, together with the boost to stocks over recent days, has contributed to the Aussie’s improved tone. The RBA has left rates on hold at 4.75% since November last year.
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