July 08, 2022Money Financial literacy Economy Good reads Commentary In the news News Trending Weekly update
What's Happening Today - July 8
The shocking news of the assassination of former Japanese Prime Minister Shinzo Abe is dominating the headlines this morning. However, North American markets seem to have shrugged off the news, and appear to be more focused on the employment data out of Canada and the U.S..
When an inflationary overheating is the number one concern, bad news can be good news, so Canada’s jobs decline in June could be considered a bit of welcome relief. But the 43K decline in employment was to some extent offset by a reduction in labour force participation, which had the unemployment rate diving to 4.9%. Moreover, hours worked were up 1.3%, so this wasn’t an unambiguous sign of a an economic slowdown. Hourly wages jumped to a 5.2% year on year pace (from 3.9%), and while this is the least accurate of Canada’s various wage indicators, it adds to evidence that wage inflation is heating up in the second quarter. Jobs declines were centered in self-employed and service sector positions, which tend to have lower output per hour. All told, a mixed bag in what’s often a volatile series, and on its own, the headline jobs decline isn’t yet convincing evidence of a slowdown that will deter the Bank of Canada from a 75 bp hike next week.
Turning to the States, hiring remained too hot for the Fed’s comfort in the U.S. in June. The 372K jobs created were above the consensus of 265K, even when accounting for the -74K revision to the prior two-month tally, with hiring being tilted towards private services. In contrast, the household survey showed a loss of 315K jobs, and combined with a slight drop in the participation rate, the unemployment rate remained steady at 3.6%, as expected. Average wages grew by 0.3%, in line with expectations, but an upward revision to the prior month left the annual pace of growth a tick above expectations at 5.1%. Overall, the continued strong hiring in the payrolls survey supports a likely 75bp hike by the Fed later this month.
Over in the Eurozone, the prospect of German energy rationing comes ever closer. This comes as the German Economy Minister sanctioned the country moving to the second stage of the countries emergency gas plan late last month. Next week sees the Nord Stream 1 pipeline shutdown for 10 days of scheduled maintenance. This comes as supply has been trimmed to around 60% of capacity over recent weeks. Germany fears that supply may not be switched back on post the maintenance period, and such fears are reflected in benchmark European gas prices having exceeded the December peak. European natural gas prices are set to witness the longest stretch of weekly gains this year, underlining an increasing existential threat to the Eurozone growth narrative. Nevertheless, despite energy price gains we would expect the European Central Bank to stick to a 25bps hike this month; indeed a more aggressive move could panic the market amidst fears that President Lagarde had lost control of the Governing Council.
Meanwhile in the United Kingdom, the political sideshow continues. After the excitement of Boris Johnson announcing his resignation from the leadership of the Conservative party yesterday (he did not actually utter the word resignation), the focus now switches to both who will be his successor and the risks of a protracted political vacuum. In terms of the latter, Johnson is now slated to lead a caretaker regime into the autumn as the Conservatives run a leadership process, the details of which will only be agreed upon on Monday. Conservative MP’s are likely to be keen to whittle down candidates (there could be as many as around 12), to a final two by the time of the Parliamentary recess on July 21st. The final stage of the process would see a ballot of Conservative members over the summer, they would have a straight choice of one of two final candidates. Boris Johnson has suggested he could remain caretaker Prime Minister until the party conference which starts on October 2nd. However, there are moves to expedite the process such that a leader could be announced in time for the Parliamentary return on September 5th. Some Conservative Party members, including former PM Major, are keen for the Prime Minister to stand aside for another temporary leader, one not involved in the leadership race, there is no formal mechanism for that to take place. Either way, big decisions, notably in relation to providing any fiscal measures to offset the cost of living crisis will be postponed. Discussion of tax cuts or measures to ease petrol duty will be shelved, leaving an aggressive squeeze on the consumer, expect the BRC retail sales monitor to witness a fourth year-over-year decline in June. A postponement of any fiscal easing is likely to be accompanied by business investment decisions also being stalled. Moreover, as GfK consumer sentiment is already well beyond even GFC crisis lows, the series registered a record low of -41 in June, we can expect discretionary spending to continue to slide. The upcoming week witnesses a mass of real economy data, including industrial output and manufacturing production plus we get May monthly GDP. After failing to generate any monthly output gains since January the market is looking for a modest 0.1% gain in May, we remain wary of another negative outcome.
Asian markets closed mixed, though Japanese stocks gave up most gains on reports that former Japanese Prime Minister Shinzo Abe was assassinated during a speech. Japanese Upper House elections are still scheduled to run over the weekend. We can expect LDP voters to support the Abe legacy, remember he was the architect, along with Bank of Japan Governor Kuroda, of the current reflationary policy. We had not expected this weekend’s upper house elections to have a material market impact, we had assumed that the LDP/Komeito coalition would retain a majority, largely without incident. However, the tragic assassination of former LDP PM Shinzo Abe points towards additional LDP votes, adding impetus to the premiership of Fumio Kishida. Solid LDP gains in the Upper House election should allow Kishida to push back against any internal criticism of the broad reflationary strategy. We would expect the Abe faction within the Japanese Parliament, the Diet, to bridle at any condemnation of the reflationary narrative. South Korea has announced measures valued at about 625 million US dollars to help ease the cost of living, including removal of tariffs on some food imports and increased welfare support for low income earners. U.S. Treasury Secretary Janet Yellen will head to Asia next week as she seeks to build support for a price cap on Russian oil. The Russian Foreign Minister has said that attempts to isolate Russia with sanctions was akin to a declaration of economic war by the West.
Oil prices slipped as investors weigh tight global supplies with fears of a recession reducing demand.
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