Positives
1) Within the payroll report, the household survey reflected a jump of 590k jobs (the biggest contribution from those aged 25-54) which combined with an increase of 571k in the size of the labor force kept the unemployment rate unchanged at 3.7% as expected. The participation rate rose two tenths to 63.2% which does match the most since 2013 thanks to a pick up in the key age area of 25-54. Hours worked rose .1 as expected and back to 34.4 after last month’s dip. This helped to increase average weekly earnings to 2.9% y/o/y as average hourly earnings rose .4% m/o/m and 3.2% y/o/y.
2) The August ISM services index surprised to the upside with a print of 56.4, up from 53.7 in July and vs the estimate of 54. That is basically in line with the average year to date of 56.3. New orders rose, backlogs fell. Employment and export orders softened. Of the 18 industries surveyed, 16 saw growth vs 13 in July. ISM said “The non manufacturing sector’s rate of growth rebounded after two consecutive months of cooling off. The respondents remain concerned about tariffs and geopolitical uncertainty; however, they are mostly positive about business conditions.”
3) After declines seen in 6 of the past 7 weeks in mortgage applications to buy a home, notwithstanding this sharp drop in rates, purchases did rise 3.6% w/o/w. The y/o/y gain remains a modest 5.1% in light of that mortgage rate drop. The refi momentum has slowed over the past two weeks as it fell 7% for a 2nd straight week. However, it is up a quite robust 152% y/o/y.
4) August auto sales, helped by Labor Day sales, totaled 16.97mm at a SAAR, just above the estimate of 16.8mm and up from 16.82mm in July.
5) Discussions between the US and China will resume. Let’s hope they are more than just ‘constructive.’
6) Hong Kong CE Carrie Lam finally did what she should have done months ago.
7) The PBOC cut its reserve ratio requirement by 50 bps to 13% but told the market that this is not part of a “flood like monetary stimulus.” Smaller lenders will get a 100 bps cut. Quantifying the extra yuan available for lending comes to about 900b, or around $125b.
8) The private sector China Caixin services PMI for August did improve by .5 pt to 52.1 vs the estimate of 51.7. The manufacturing component rose to 50.4 from 49.9 vs the forecast of 49.8.
9) The South Korea manufacturing PMI rose to 49 from 47.3 but is the 9th month in the past 10 below 50.
10) Japanese wages in July did finally rise after 6 months of declines. Regular base pay rose .6% y/o/y, but still no different than the current rate of inflation and a 2.2% y/o/y decline in bonus’ paid wiped out the base pay and overtime pay increase. REAL earnings thus fell by .9%.
11) The Eurozone services PMI was revised to 53.5 from 53.4 from 53.2 in July. New orders though fell to a 3 month low and employment dropped to the lowest since January. Markit said “A sharp drop in business optimism about the coming year in the service sector, down to the lowest for 6 years, suggests that companies are already braced for tougher times ahead.”
12) We’re finally hearing from ECB and BOJ members and others that are questioning the need for more extreme monetary measures.
- Governor Kuroda: longer dated yields had “fallen a bit too far.”
- Former VP of the ECB Constancio: “There is certainly a limit if one thinks about the impact on banks and the financial system, which has problems in working well with a policy of negative rates. My personal view is we’re already close to the limit.”
- French central banker Villeroy didn’t come out and endorse more QE when asked but he also didn’t disagree for the need for more easing and possibly more lower rates.
- Last week, ECB member Lautenschlaeger said of QE, “It should only be used if you have a risk of deflation; and the risk of deflation is nowhere to be seen.
- Bundesbank head Weidmann, not surprisingly said “I call for special caution with government bond purchases.
- Austrian central bank head Holzmann: “I’ll probably express more criticism toward proposals for further monetary deepening.
- Estonian central bank head Muller: “I don’t think we have a strong case for reactivating QE now.”
- Klass Knot, Dutch central bank: “There is no need for it in my reading of the inflation outlook right now.”
- Riksbank reiterates that it still plans on cutting rates back to zero by year end from -.25%.
- Last week BoJ member Hitoshi Suzuki said “I don’t see the need to ease monetary policy further now…It’s hard to predict when Japan will see borrowing costs reach a reversal rate. But it might not be too distant in the future.”
- The former head of Sumitomo bank said cutting rates again to further below zero would be “outrageous” and “meaningless.” He also said “Monetary policy isn’t a cure all economic remedy to start with, and the negative abstract nuance attached to the negative rate only discouraged consumer activity, outweighing the positive impact from lower interest rates.”
Negatives
1) The BLS establishment survey said the economy in August added 130k jobs, 30k less than expected and the prior two months were revised lower by a combined 20k. Worse was the private sector read which added just 96k jobs while July was revised lower by 17k. The U6 rate did tick up by 2 tenths after falling by a like amount in July. There was a jump to a 4 month high in part time workers because of ‘slack work’ which is an economic reason. Smoothing out the monthly noise puts the 3 month average in hiring at 156k vs the 6 month average at 150k, the 12 month average of 173k and vs the 2018 average of 223k. Taking out the influence of the recent jump in government hiring, private sector job growth has averaged 129k over the past 3 months vs 136k in the past 6, 165k over the past 12 and vs 215k in 2018.
2) Initial jobless claims totaled 217k, 2k more than expected and up 1k from last week. The 4 week average rose to 216k from 215k.
3) Markit’s services PMI for the US fell to 50.7, just above the breakeven level. That’s the lowest since March 2016 while new orders rose at the slowest pace also since early 2016. Of particular note, “The rate of job creation was the softest since February 2010 as firms expressed greater reluctance to increase staffing, with the vast majority noting no change in workforce numbers.” Markit said in its bottom line that “A major factor behind the deterioration was the spreading of the manufacturing downturn to the services sector, via weakened household and business confidence.” They expect growth in GDP in Q3 of below 1.5%.
4) The August ISM manufacturing index has fallen into contraction with a print of 49.1, down from 51.2 in July and below the estimate of 51.3. That is the weakest since January 2016. Of note, new orders fell to 47.2 from 50.8 and that matches the lowest level since April 2009. Of 18 industries surveyed, half saw growth, the same number as in July while 7 are seeing a contraction. ISM said “Comments from the panel reflect a notable decrease in business confidence…Respondents expressed slightly more concern about US-China trade turbulence, but trade remains the most significant issue, indicated by the strong contraction in new export orders. Respondents continued to note supply chain adjustments as a result of moving manufacturing from China.”
5) The new batch of tariffs and tariff rates on China is in place as well as the new tariffs from them on us.
6) The Brexit situation continues in disarray.
7) German reported that July industrial production fell .6% m/o/m instead of rising by .4% as expected. It was only partially offset by a 4 tenths upward revision to June. The Economy Ministry said simply, “Industrial momentum remains weak.”
8) German factory orders in July was weaker than expected, falling 2.7% m/o/m, about double the estimate of a 1.4% drop. On a y/o/y basis, orders have fallen for 14 straight months. Most of the weakness was a drop in non Eurozone orders.
9) Eurozone August manufacturing PMI was left unrevised at 47 and is now below 50 for the 7th straight month.
10) UK manufacturing PMI in August fell to 47.4 from 48. The estimate was 48.4 and that’s a multi year low. The services PMI dropped to 50.6 from 51.4 and vs the estimate of 51.
11) China’s state sector weighted manufacturing and service composite index fell a hair in August to 53 from 53.1 with a slight decline in manufacturing to 49.5 from 49.7 and uptick in services to 53.8 from 53.7.
12) Hong Kong’s August PMI fell 3 pts to 40.8 and thus is well below the breakeven of 50.
13) Singapore’s August PMI fell below 50 at 48.7 from 51. Markit said “Demand was impacted by softer conditions in domestic and overseas markets, leading firms to reduce output at the sharpest rate in 7 years. Global economic uncertainty and sluggish demand weighed on sentiment towards year ahead, with confidence at an historical subdued level.”
14) Manufacturing PMI’s fell m/o/m in Japan, Taiwan, Thailand, Philippines, Indonesia and India.
15) India’s services PMI fell to 52.4 from 53.8.
Peter is the Chief Investment Officer at Bleakley Advisory Group and is a CNBC contributor. Each day The Boock Report provides summaries and commentary on the macro data and news that matter, with analysis of what it all means and how it fits together.