US data distorted by extreme weather – weekly update 9 October

US non-farm payrolls distorted by extreme weather

US non-farm payrolls for September were heavily distorted by hurricanes Harvey and Irma, causing the headline rate to plunge to a net loss of -30,000. The first negative reading since 2010 was driven largely by the loss of jobs in bars and restaurants as well as related sectors, as a result of the hurricanes.

Whilst the reading was well below the cautious forecast of 90,000 (compared to 169,000 jobs added in August), in reality it has a negligible impact on the outlook and was already marked as being anomalous, with the expectation it will rebound in future months.

Digging below the surface actually reveals further robust signals in the labour market, with the national jobless rate falling 0.2% to 4.2%, and reported by officials as not being affected by the extreme weather. Wage growth of 0.5% month on month (mom), from 0.2% last month and expectations of 0.3%, was higher than expected. However, this should also be taken with a pinch of salt, since many of the jobs lost due to the extreme weather would have been at the lower end of the wage spectrum.

The participation ratio (the proportion of people with jobs out of the pool of individuals available to work) rose 0.2% to 63.1% and a household survey measure showed significant improvement in the number of people in employment, as well as a reduction in underemployment. Overall, this print will be put down as an anomaly, whilst the underlying state of the US labour market appears strong, despite the conspicuous absence of sustained wage rises.

All of this supports a view that the US Federal Reserve will continue on its course of cautiously tightening monetary policy from ultra-loose levels, through balance sheet reduction (quantitative tightening) and gradual interest rate rises over the next few years.

Mixed economic data, but few signals are flashing red

Economic data were mixed across regions. The US had a great release run, with Purchasing Manager Index (PMI) measures from the Institute for Supply Management (ISM) hitting the highest levels in over a decade. The ISM Manufacturing PMI pushed through the 60 mark, coming in at 60.8 from 58.8, and defying forecasts for a slip to 58.0, whilst the ISM Non-Manufacturing measure was also very strong, rising from 55.3 to 59.8 (55.5 was expected).

The news from this side of the Atlantic was more of a disappointment. In the UK, Manufacturing PMI fell more than expected from an upwardly-revised 56.7 to 55.9 (56.4 was forecast), whilst Construction PMI fell into contractionary territory (any reading below 50), down from 51.1 to 48.1 (51.0 was expected). Services PMI managed to buck this trend, rising 0.4 points to 53.6, against market expectations for no change.

There were no new PMI data releases from the Eurozone, but Retail Sales fell again, down -0.5% month on month in August after a -0.3% fall previously – although markets were looking for a recovery to 0.3% growth. This depressed the year-on-year (yoy) reading to 1.2% (from 2.3%, with 2.6% expected). Taken together, the overall economic outlook remains decidedly mixed, but there are currently few signals flashing red.

Last week’s other events

• Japan’s Tankan indices of business activity for the third quarter suggested a strong environment for manufacturers with a positive outlook. Consumer confidence was also encouraging, with the index rising from 43.3 to 43.9 (43.5 expected). Broadly in line with the Tankan survey reading, the leading index of business cycle indicators increased from 105.2 to 106.8 (though just shy of the 107.1 expected). Against this, the Composite PMI reading slipped from 51.9 to 51.7.
• Eurozone unemployment was unchanged at 9.1% in August (forecast was for a fall to 9.0%). Producer Prices Index (PPI) inflation rose faster than expected, from 2.0% to 2.5% year on year (2.3% expected).
• In the UK, there were further signs of potential consumer fatigue, as new car registrations were down -9.3% yoy in September, following a -6.4% fall in August.

The markets

Activity was fairly limited across major markets, as equities moved higher and bonds were essentially unmoved – though, for sterling investors, the weakening pound will have boosted returns on unhedged overseas assets.

One month performance of major asset classes

Equities

Most major equity markets moved higher on the week. Emerging markets (as measured by the MSCI index) returned 2.3%, followed closely by the MSCI United Kingdom index which rose 2.0%. In the US, the S&P 500 returned 1.3% on the week. Lagging further behind, the TOPIX index of Japanese equities gained 0.7% whilst continental Europe returned just 0.5% (MSCI Europe ex-UK).

Bonds

10-year gilt yields fell 2 basis points (bps) to 1.36%, in contrast to US Treasuries, which saw 10-year yields rise 2 bps to 2.36%, whilst 10-year German bund yields were unchanged at 0.47%.

Commodities

Oil was volatile during the week, but ended weaker, albeit still at the upper end of its recent trading range. Brent crude oil closed at US$55.62 per barrel on Friday. Gold was little changed on the week, finishing at US$1,271.60 per ounce, but copper saw its price surge at the end of the week, ending at US$3.01 per lb on Friday.

Currencies

Sterling was noticeably weaker through the week, finishing at US$1.31, €1.12 and ¥147.

The week ahead

There are a few mid-level data points to watch out for this week. Tuesday sees UK Industrial Production for August, with an improvement from 0.4% to 0.8% yoy expected. The latest Federal Open Market Committee (FOMC) meeting minutes are released Wednesday evening, at 7pm UK time and could provide some interest from the more detailed discussions of the committee. On Thursday it is the Eurozone’s turn for Industrial Production, with expectations for a moderation from 3.2% to 2.5% yoy growth. The US is in focus on Friday, with US Retail Sales (1.6% from -0.2% mom expected) and CPI Inflation (an increase from 1.9% to 2.3% is forecast). There are also plenty of political events scheduled this week, especially across Europe, with the latest round of Brexit negotiations on Monday, a statement on Tuesday from the Catalonian government following last week’s controversial independence referendum and elections in Austria on Sunday. The daily breakdown is:

Monday – early in the morning, China releases the private Caixin Services PMI and Composite PMI numbers in what is otherwise a quiet day.

Tuesday – just after midnight, the British Retail Consortium publishes the latest Like-for-Like Sales figures, which will be followed in Japan with trade numbers as well as the Eco Watchers Survey. Later in the morning, UK Industrial Production data are out, as well as details of the trade balance. Just before lunchtime, we will have the Small Business Optimism reading for the US.

Wednesday – Japanese Core Machine Orders are reported early in the morning, with forecasts looking for a rebound from the -7.5% yoy reading previously to 0.8% in August. In the afternoon, the US reports MBA Mortgage Applications and the latest JOLTS Job Openings ahead of the FOMC minutes release.

Thursday – Japan reports PPI and Bank Lending activity overnight. We also have the latest UK Credit Conditions reported by the Bank of England later in the morning ahead of the Eurozone Industrial Production numbers. In the afternoon US PPI is reported, as well as the weekly Initial Jobless Claims for last week.

Friday – the US has most of the action on Friday. As well as the main events of CPI and Retail Sales, we will also have sentiment survey data from the University of Michigan and Business Inventories to see the week out.