3 August 2018
US jobs: Headline disappoints, but it will turn round

US payrolls growth of 157,000 is disappointing but there were upward revisions, and forward-looking indicators suggest more big jobs gains to come

Mixed report

The July US jobs report shows payrolls rising 157,000 versus the 193,000 Bloomberg consensus, but there were 59,000 upward revisions to recent history so overall it’s close to market predictions. Wages rose 0.3% month-on-month, in line with expectations, which leaves the annual rate of wage growth at 2.7%. The unemployment rate moved back down to 3.9% from 4% while U6 underemployment is at 7.5% versus 7.8% previously.

The headline payrolls number is softer than hoped given the rise in the ISM employment component, the strong ADP private payrolls report (219,000) and another really firm NFIB employment data release. Nonetheless, the marked step up in employment gains versus 2017 remains in evidence. Last year averaged 182,000 jobs per month whereas the first seven months of 2018 have averaged 215,000 job gains. This will help underpin consumer sentiment and spending through the rest of the year.

Three takeaways as the Bank of England hikes rates

The Bank of England has hiked rates and the hawkish tone of the statement has taken markets slightly aback. But despite the Bank's optimistic outlook, we think policymakers will find it tricky to hike rates again before Brexit. We don't expect another rate rise before May 2019

The Bank of England has opted to increase interest rates for only the second time since the financial crisis, but for investors what really matters is what it has – or hasn’t – said about its next steps. Here are our three key takeaways

1 The Bank's unanimous decision came as a slight surprise for markets

Back when the Bank of England hiked in November, two voters (John Cunliffe and Dave Ramsden) dissented, preferring to keep rates on hold. This time, however, the committee was much more united. Ramsden – who said recently that he is “more comfortable” with the balance of risks – voted in favour of a hike. And despite recently making the case for “stodginess” in the approach to setting policy, Cunliffe decided not to dissent either. That meant that today’s decision to raise rates was unanimous, which may have caught some investors slightly off-guard.

2 The Bank remains upbeat on growth - we are more cautious

Back in May, markets weren’t totally convinced by the Bank’s bold assertion that the first quarter economic weakness was temporary. But generally speaking, the data since then has backed up the BoE’s story and it’s clear they remain comfortable with the outlook. Whilst it did give a nod to trade tensions and Brexit uncertainty in the minutes, it continues to expect business investment and trade to support activity and it now expects a slightly higher path of growth in the medium term.

We are more cautious. Once the effect of the sunny weather starts to fade, the cracks in the high street are likely to resurface. Consumers remain cautious, and real incomes remain under pressure (even if they are no longer falling). And given that Brexit uncertainty is only likely to ramp up, we think investment is likely to stay subdued too.

3 Few hints about the Bank's next steps as 'no deal' chatter increases

Going into Thursday’s meeting, markets were anticipating the next rate hike in roughly a year’s time. But given the Bank’s outlook for growth and inflation, we think policymakers would ideally prefer to raise rates before then. The big question going into this meeting was whether they’d come out and say so explicitly.

In the end – unsurprisingly - they didn’t. Aside from reiterating that “ongoing tightening” was needed, the Bank offered no stronger signals of intent. We suspect this is because policymakers are acutely aware that Brexit could make it increasingly complicated to increase rates again before the UK leaves the EU in 2019. Talk of ‘no deal’ is ramping up, and crucially it might not be until early next year before a deal to avert a cliff edge scenario is struck. Until then, there's a risk consumer and business sentiment starts to deteriorate.

Having said all that, the Bank has announced explicitly for the first time that it estimates the longer-term neutral rate to be 2-3%. Depending on how you look at it, this could be interpreted as a subtle prod for markets to lift their rate expectations for two-three years’ time. That’s possibly a stretch, but either way, with Brexit risks mounting, markets are unlikely to take too much notice.

Federal Reserve reaction: No deviation

The Federal Reserve has left policy unchanged. The accompanying statement continues to provide an upbeat assessment, necessitating ongoing “gradual” interest rate hikes

The Federal Reserve has left monetary policy unchanged and the accompanying statement is little changed versus June. The main tweak is that they now state economic activity is expanding at a “strong” rate, rather than “solid” as they described the situation in June. It also sounds as though they acknowledge a pick-up in inflation, stating that inflation will “remain near” 2% rather than “have moved close to” 2% as stated in June. These are marginal changes with the main point being that they are sticking to the assessment that “further gradual increases” in interest rates are anticipated by the FOMC.

Last Friday’s GDP report really underlined the positives within the US economy. Businesses and households are reaping the benefits of massive tax cuts while the jobs market goes from strength to strength. While we are likely to see a bit of a slowdown in 2H18 reflecting tighter monetary conditions and some nervousness over trade protectionism we still expect to see 3% GDP growth for 2018 as a whole.

At the same time inflation is approaching 3% and there is growing evidence that wage growth is showing signs of life. Consequently, we see some risk to the market’s benign reading of inflation prospects in the months ahead. Trade policy remains a threat, but for now the positives significantly outweigh the negatives, hence the Fed’s decision to stick to the “gradual” rate hike path. As such we look for rate hikes in September and 4Q18 – probably December –  with two more coming in 2019. The risks, in our view, remain skewed to the upside.

Trump: The destroyer of economic relationships?

President Trump’s penchant for shaking things up has evidently, although presumably not intentionally, spread to data relationships. What is causing this and will things ever return to 'normal'?

Great is good, fantastic is better…

Last Friday’s 2Q GDP report was obviously great. The 4.1% annualised growth figure was the strongest recorded since 2014 and suggests that the economy is reaping the benefits from the tax cuts enacted last December. However, surveys suggest that growth should have been even stronger. 'Great' growth is good, but 'fantastic' growth would have been much, much better.

A notable breakdown in historically strong relationships

Since President Trump’s election, there's been a notable break down in historically strong relationships between official activity data and third-party surveys. For instance. the ISM manufacturing index has been asking businesses what they are experiencing in terms of orders, output and employment for the past 70 years and it's arguably been the best lead indicator for GDP growth in the coming quarter. However, rather than agreeing the economy is growing around 4%, it is at levels historically consistent with GDP growth of nearly 8%.

India: Reserve Bank hikes rates for second time

Although the Reserve Bank of India's (RBI) tightening cycle has yet to fully play out, evolving growth-inflation dynamics will likely cut it short. We have pencilled in one more 25 basis point rate hike in October

No RBI policy surprise

In its second policy tightening this year, the RBI lifted the benchmark policy interest rates by 25 basis points today, taking the repo rate to 6.50% and reverse repo rate to 6.25%. There was no change to the 4% reserve requirement rate for the banking sector.

However, unlike the June rate hike, today’s decision wasn’t a unanimous vote by all six policy committee members. There was one dissenter. Still, the outcome was in line with the broad consensus, including ING's forecast. Hence, we expect little to no market impact.

Japan: Some policy tweaks but not a lot

Has the Bank of Japan strengthened its commitment to reaching the 2% inflation target or conceded defeat in getting there anytime soon? Absent a departure from an ultra-easier monetary policy stance, the 10-year JGB yield should retrace its recent spike

BoJ maintains ultra-easier monetary policy stance

As widely expected, there was no change to the Bank of Japan’s ultra-easier monetary policy stance, though today’s policy meeting wasn’t a complete non-event. There were some policy alterations aimed at enhancing the sustainability of its monetary policy, with more flexible market operations towards the price stability target of 2%. But the changes were subtle.

As we expected, the BoJ didn't abandon its inflation target nor was there any reduction in the asset purchases pace, both having grossly underperformed the 2% and JPY80 trillion targets, respectively.

Reading time around 8 minutes

In case you missed it: One hike, one tweak, one hold

It was a busy week for the world's major central banks and while we weren't really surprised at the outcome of the meetings, there was just enough in there to keep us interested

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