Amidst The Quiet Summer Markets
Aside from the news of a potential “informal” OPEC meeting in September, which has driven a short-covering rally in Oil, markets have been a lot quieter this week as we enter the summer doldrums. However, two issues worth noting are the recent US productivity numbers which were poor alongside weak Industrial production and trade data from the UK and the fact that on only the second day of the bank’s new QE programme the BOE failed to complete purchases to the amount they were looking for.
US Data Drop
Q2 Non-Farm Productivity estimates came in weak at -0.5% v 0.4% expected and -0.6% previous. This marked the third consecutive quarterly decline, which given weak prints elsewhere might not stand out, but does, in fact, mark the first time this has happened in 37 years. This slowdown in productivity growth is likely to put further pressure on the US economy as the year on year figure similarly fell to -0.4% marking the slowest rate since the second quarter of 2013 which was -0.6%/ Alongside this data we saw estimates for Q2 labour costs printing just above expectations at 2% vs. 1.8%, however this was offset by the significant downward revision of the previous quarter from 4.5% to -0.2%.
Productivity at such low levels is a bad sign for the economy and doesn’t bode well for growth as it increases the likelihood that business will eventually scale back their labour demand and whilst some might suggest that this investment could be a focus on capital instead, capital investment has been an elusive beast over recent years. This data takes the shine off the recent payroll gains seen in July suggesting that business profits will continue to weaken and employment is likely to soften again in coming months. Further employment data is released today with the BLS’ JOLTS series, closely watched due it being a favourite of Yellen’s, however as the data references June it is likely to be positive given the recent surge in payrolls data, but isn’t a good indicator of future performance.
Weak UK Data
UK Manufacturing Production for June came in weaker than expected at -0.3% YoY vs -0.2% expected. Industrial Production gained slightly in June, matching expectations. Over the second quarter, total production rose by 2.1%, confirming the out-turn of the GDP report last month, marking the biggest rise since the third quarter of 1999. Production added 0.3 percentage points to total GDP growth of 0.6% in Q2.
However, the standout data was the UK VisibleTrade Balance which widened to $12.5bln in Q2 from £12bln in Q1, which could translate into weaker 2Q GDP. Alongside this, the total trade gap in May was revised significantly higher to £4.2bln from £2.2bln previous due to increased goods imports. Total Trade Balance for June widened to £5.1bln, more than double the expected £2.25bln marking a 10 month low.
Following this weak data 10Y and 30Y yields fell by -3bps and -5bps respectively, hitting all-time lows, weighed upon further by comments from BOE’s McCafferty who indicated that further rate cuts and QE would likely be necessary. These comments marked a stark departure from his stance earlier in the year when he was in favour of a rate hike.
Despite higher than market prices in its new QE programme the BOE failed to purchase the amount of long gilts it was looking for buying only £1.118bln instead of the planned £1.17bln. This is worrisome for the BOE given that they are already mentioning that they have the room to increase if required. Commenting on the purchases, the Bank of England note that the £52mio shortfall from Tuesday’s reverse auction will be incorporated in the second half of six-month bond purchase programme. Sterling remains under pressure today following comments from BOE agents noting that Brexit has had a negative impact on hiring turnover scores for jobs, and investment plans are weaker with business services growth having softened further.
Focus shifts to the RBNZ tonight with a 25bps cut widely expected, indeed all 16 participants in a Bloomberg survey ahead of the meeting are looking for a 25bs cut. With expectations so rife, unless the RBNZ surprise with a deeper cut, forward guidance will be the key element with traders keen to judge the likely rate path over the remainder of the year; some analysts suggest the headline rate needs to fall by around 100bps to effectively lower the NZD and boost inflation.