The continuing strength in the US labour force saw a fairly hefty rise in bond yields Friday night. We’re talking 20 bps to 2.74 per cent, which is the highest yield in about two years. That’s a big jump but completely understandable given the employment numbers – 195,000 jobs created in June following an increase of the same in May and an increase of about 200,000 in April. You get the gist – this is serious jobs growth.
Now, despite the strong growth in payrolls, the US unemployment rate was unchanged at 7.6 per cent and there are a couple of reasons for that. Firstly it’s calculated from a different survey where jobs growth, while solid, hasn’t been quite been as strong as payrolls. Secondly – and more importantly – the participation rate has lifted to about 63.5 per cent from 63.3 per cent in April. It’s still lower than last year but there are structural reasons for it to be lower, which I‘ve discussed before.
All in all a great report then – bond yields higher and even stocks pushing higher with gains around the 1 per cent mark for the major indices. Good news really was good news for a change… except for in the metals space. Metals were trashed (gold down almost $40, copper off 3.5 per cent, silver down 4.3 per cent), probably given the lift in the US dollar as a result of those payroll figures. The euro was down about 120 pips to 1.2812, the yen shot up to 101.2 which is only a little above the target of 100 and the Australian dollar is at 0.9055 from 0.9162 before the figures. Only crude bucked that trend given Middle East concerns – up nearly 2 per cent to $103.2.
It’ll be interesting to see what happens to our market this week. The SPI points to a fall so far, of about 0.3 per cent as commodities get smashed. We should quickly get Australia’s economists out on their global marketing rounds: “Things are terrible and Australia is at risk of a serious downturn” – that ought to drum up a bit of global interest in Aussie stocks. Garn, get into it fellas!
On that note there is some key Aussie data out this week. Aussie employment figures Thursday will probably be the key release for us. So far this year we’ve seen 100,000 jobs created which stands at odds with our ‘serous downturn’ and the key reason for that is that small businesses are the largest employers in Australia.
Anyway for this past month (June), forecasters reckon there were no jobs created and that the unemployment rate will rise to 5.6 per cent from 5.5 per cent. Now remember, forecasters were also saying that the unemployment rate would be 6 per cent last year and it actually ended the year at 5.4 per cent. It’s true to say that the unemployment rate is rising, but the increase has been extremely modest at a quarter of a per cent or so. The broader fact is that the unemployment rate is still low and jobs growth thus far has been solid.
Weak confidence has the power to change that though and as it happens we also get a confidence update this week. National Australia Bank’s business survey comes on Tuesday and Westpac’s consumer sentiment survey is on Wednesday. As we know, confidence is shot in this country on a combination of terrible political leadership and some fairly atrocious stuff in the corporate space as well – demands for corporate welfare and the associated PR. The campaign to weaken the Aussie dollar and slash rates has been a part of that and has been terribly destructive.
People are scared. What will be interesting to see is the impact of the leadership spill. You don’t need me to tell you that Julia Gillard and Wayne Swan were extremely unpopular and you would expect to see a lift in confidence as a result – certainly the polls suggest there will be. Similarly the Reserve Bank held rates steady and we saw the immediate impact that had on confidence via a spike in the All Ords. That’s consistent with what we’ve being seeing for a while now – when the RBA cuts, confidence gets smashed; when they hold, confidence gets an almighty boost. Why? Because people feel comforted when policy makers don’t panic over nothing.
In the global space, China data is key. Of major interest will be the money and credit stats. The latest fiction is about China’s credit crunch – of which there isn’t one unless the Chinese government wants to engineer one. Otherwise, we see China inflation and trade figures.
For the US for once, there really isn’t a lot. But I guess we’ll be dealing with the fallout from those employment figures for most of the week. The key release will probably be the Federal Reserve minutes on Thursday, although I think we’ve got a pretty good idea of Fed intent at the moment. Elsewhere the Greek Finance Minister said that a deal with international creditors will probably be reached sometime today/tonight ahead of the Eurogroup meeting.
Have a great week…
Adam Carr is a leading market economist.
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