Date: August 2, 2019
U.S. Jobs Report to Offer Litmus Test for Fed After Rate Cut
“The next U.S. jobs report is more likely to embolden the Federal Reserve to keep this round of interest-rate cuts short and sweet, rather than validate investor views that the economy needs significantly more monetary easing. The Labor Department figures Friday are expected to show payroll gains moderated to a still-solid 165,000 in July, according to the median estimate in a Bloomberg survey. Unemployment probably ticked down to a half-century low of 3.6% and wages remained solid, albeit without accelerating. The next U.S. jobs report is more likely to embolden the Federal Reserve to keep this round of interest-rate cuts short and sweet, rather than validate investor views that the economy needs significantly more monetary easing. The Labor Department figures Friday are expected to show payroll gains moderated to a still-solid 165,000 in July, according to the median estimate in a Bloomberg survey. Unemployment probably ticked down to a half-century low of 3.6% and wages remained solid, albeit without accelerating. Fed Chairman Jerome Powell stressed on Wednesday that the economy remains in good shape and said the reduction in borrowing costs will help insure against weak global growth and uncertainty over trade policy, while helping to boost inflation closer to the central bank’s goal. “At this stage, the economy is still quite strong,” said Gregory Daco, chief U.S. economist at Oxford Economics. The employment report will help determine “whether further rate cuts are needed down the road, and a strong report would be an indication that perhaps we need to do less rate cuts than anticipated.” If the payrolls number syncs with the Fed’s view that the U.S. economy needs only a little help to keep expanding, that could push up yields on shorter-dated Treasuries in particular, said John Lovito, co-chief investment officer for global bonds at American Century Investments. “A strong number will reinforce the notion that the Fed easing cycle may not be as aggressive as previously thought,” Lovito said. On Thursday, traders of fed funds futures boosted the amount of easing they expect from the central bank this year after President Donald Trump abruptly escalated his trade war with China by announcing new tariffs. More than half a percentage point of reductions is now priced in. For U.S. stocks, which on Wednesday posted the biggest decline in two months and headed Thursday for the lowest close since June on the tariff news, a more robust jobs number could hurt equities by reducing chances of deeper Fed easing. Stocks may rise on a poor figure, as long as it’s not so terrible that it suggests the Fed would be powerless to stop a recession. “There’s an environment of, good news is going to be bad for the markets,” said Chris Gaffney, president of world markets at TIAA Bank. “If we see a big miss, you could see investors look to increase the odds of additional Fed cuts and that would be positive for the markets at this point.” Despite a few stumbles this year, the labor market has remained broadly solid — a point the Fed reiterated in Wednesday’s statement. A separate Labor Department report Thursday showed filings for unemployment benefits remained low last week. The July forecast for job gains is in line with expectations for a gradual moderation, rather than a sharp slowdown. Wages may get some more attention this time. They’ve decelerated slightly since February, when earnings growth hit the best pace of the expansion, and the tight labor market has failed to meaningfully push inflation toward the Fed’s 2% goal. But if wage gains accelerate once again, it may limit the case for the Fed to aggressively lower borrowing costs.”
U.K. Construction Shrinks for a Third Month on Brexit Woes
“U.K. construction output fell for a third straight month in July as new orders tumbled on Brexit uncertainty and subdued economic growth. The figures are the latest to paint a picture of a U.K. economy hamstrung by political turmoil, with anecdotal evidence suggesting Brexit-related risk aversion is holding back projects, according to IHS Markit. The uncertainty may increase as the U.K. heads for its Oct. 31 deadline for leaving the European Union. New Prime Minister Boris Johnson says he is committed to leaving on that date, with or without a deal. Markit’s activity index stood at 45.3 last month, up from June’s 10-year low of 43.1. It was still weaker than economists forecast and well below the 50 level that indicates expansion. The broad-based drop was driven by commercial work, while confidence among survey respondents was at the lowest since November 2012. “Construction companies have started to respond to lower workloads by cutting back on input buying, staffing numbers and sub-contractor usage,” said IHS Markit economist Tim Moore. “If the current speed of construction sector retrenchment is sustained, it will soon ripple through the supply chain and spillovers to other parts of the U.K. economy will quickly become apparent.” A report on Thursday showed the U.K.’s manufacturing sector is in its worst downturn for six years. Markit will release a similar gauge for the dominant services industry on Monday. ”
China Pledges to Counter Trump’s Threat of More U.S. Tariffs
“Beijing pledged to respond if the U.S. insists on adding extra tariffs to the remainder of Chinese imports, as President Donald Trump’s abrupt escalation of the trade war between the world’s two largest economies sent stocks tumbling from Asia to Europe. Trump announced Thursday that he would impose a 10% tariff on a further $300 billion in Chinese imports, a move set to hit American consumers more directly than his other tariffs so far. The new import taxes, which Trump later said could go “well beyond” 25%, will be imposed beginning Sept. 1 on a long list of goods expected to include smart-phones, laptop computers and children’s clothing. “If the U.S. is going to implement the additional tariffs, China will have to take necessary countermeasures,” Foreign Ministry spokeswoman Hua Chunying said at a regular briefing in Beijing on Friday. She didn’t elaborate on what the measures would be. “China won’t accept any maximum pressure, threat, or blackmailing, and won’t compromise at all on major principle matters,” Hua said. The threat to tax practically all U.S. imports from China marks the biggest escalation so far taken by the Trump administration and brings a surprise end to a truce that had only been in place since he met Xi Jinping, his Chinese counterpart, in Osaka at the end of June. Bureaucrats in Beijing were stunned by Trump’s announcement, according to Chinese officials who’ve been involved in the trade talks. China’s Foreign Minister Wang Yi made the first official response to Trump’s escalation earlier Friday. “Imposing new tariffs is absolutely not the right solution to trade frictions,” he told a local Chinese television station while attending an Asean meeting in Bangkok. The Stoxx Europe 600 index slumped following big declines on Wall Street and in Asia. U.S. futures also retreated Friday, extending a drop as Beijing responded to Trump’s escalation. The offshore yuan moved closer to a record low. China’s response is complicated by the fact that the Communist Party’s top leadership is likely decamping this week to the seaside resort of Beidaihe for their annual two-week policy conclave. Officials from Xi downward disappear from public view as they privately debate policy. Analysts see China now as being less likely to try to match Trump’s tariffs dollar-for-dollar, but instead hunker down. “For the Chinese, Trump is losing his last bit of credibility here, and whether the talks can be held in September as scheduled has been put into question,” said Zhou Xiaoming, a former Commerce Ministry official and diplomat. “Deal or no deal, China is prepared for the worst-case scenario.” In a tweet, Trump said China had not lived up to a promise Xi made in Osaka to buy U.S. agricultural goods and to halt illegal exports of fentanyl. The president later told reporters he’s “not concerned at all” about the negative reaction from markets.”
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