BoE expands its stimulus program; US nonfarm payrolls beat market expectations


US Non-Farm Payrolls jumped in July for a second month and wages climbed, pointing to renewed strength in the US labor market that is likely to sustain consumer spending into the second half of the year. Indeed, the week ended on news that the US economy created 255,000 new jobs in July against 180,000 expected but down from June’s upwardly revised 292,000. Unemployment rate stood unchanged at 4.9% in July, against expectations of 4.8%.

According to the report, the rate of hiring is more than enough to gradually eliminate labor-market slack, a goal of Federal Reserve officials who’ve kept interest rates low to spur growth. Wage growth offered more promising signs of acceleration, with average hourly earnings for workers increased by 8 cents, or 0.3%to $25.69 from June to July. From a year earlier, average hourly earnings were up 2.6%. The average weekly hours of work rose 0.1 hour to 34.5 hours in July from 34.4 hours in June. The strong labor markets and wage data indicate a continuation of healthy households this year despite all the global worries.

Despite the positive US news, renewed questions about the global growth picture have investors pricing in little chance of an interest-rate increase at the Fed’s 21 September meeting and only 35% odds of a move by year end. These uncertain times have clearly weighed on the Fed’s outlook and potential monetary policy actions. On the currency front, the Euro opened the week at 1.1173against the US Dollar and managed to reach a short lived high at 1.1233. The pair slowly weakened as speculations heightened over further stimulus measures by the ECB and the strong coming US data. The currency closed the week at 1.1090.

The Sterling Pound opened the week at 1.3229 and reached a high of 1.3371 against USD ahead of the Bank of England meeting. However, the Pound quickly weakened and reached a low of 1.3099 after the MPC lowered its interest rates benchmark. Indeed, the Monetary Policy Committee introduced a larger than expected monetary policy easing program. A new Term Funding System has been launched to help banks pass on lower rates and mitigate any adverse impact on the banking sector.

Although there had been some expectation of further quantitative easing, the BoE went big with an announcement of 60 billion Pound of gilt purchases and a 10billion Pound corporate bond buying program. The BoE Governor said the MPC needed to act decisively as the Brexit vote had caused a “regime change”. The question remains whether all this additional QE will have a significant impact on the real economy. Yields are already extremely low and uncertainty is the largest impediment to growth. The stimulus package may support confidence but the BoE still forecasts a significant economic downturn. The Currency managed to close the week at 1.3075.

In Asia, the Japanese Yen remains as a safe haven for investors and keeps on extending its value compared to the other currencies. The outperformance on the Yen continues to pressure Japanese equities as well. The USDJPY opened the week at 102.05 and managed to reach a low of 100.6538 as the BOJ disappointed markets with a less aggressive than expected easing. The pair closed the week at 101.80 after the strong US data.

On the commodities side, oil prices fell last week, pushing US crude back below $40 a barrel as persistent worries of a surplus offset the impact of a weak dollar that initially supported the market. Gold prices on the other hand continue to trade higher surging on Thursday following an announcement from the Bank of England that it would lower interest rates and present further monetary stimulus. The probabilities of additional stimulus package from BoJ, ECB and BoE have caused investors continuous demand for the precious metal.

Personal Consumption Expenditures increased below forecasts
US Personal Consumption Expenditures increased by 0.1% in June, slightly below market forecasts of a 0.2% increase following a gain of 0.2% over the previous month. The gains are reflected by an uptick in spending for gas, electricity and healthcare services, which were partially offset by a reduction in spending in new vehicles. Over the past twelve months, the PCE Price Index has increased by 0.9% however remaining unchanged from the year-over-year gains exhibited in May.
The core PCE Index, which strips out volatile food and energy prices, rose by 0.1% in June, in line with market expectations and below May’s 0.2% monthly increase. On an annual basis, core personal consumption expenditures have risen by 1.6%. During last week’s Federal Open Market Committee meeting, the committee said market based measures of inflation continue to remain low, as the core PCE index hovers below its long-term targeted objective of 2%.

Slowing US ISM manufacturing
The Institute for Supply Management index of manufacturing activities dropped by 0.6% to 52.6 in July from 53.2 in June, however missing market expectations of 53.0. The index has now increased for five straight months. Construction spending however fell in July. On a different front, the Institute for Supply Management Non-manufacturing Index showed a level of 55.5 in July, one point lower than the June reading of 56.5. This represents a continued growth in the non-manufacturing sector though at a slower rate.


Euro Zone Final Manufacturing PMI drops
The final Manufacturing PMI came at 52.0 in July, down from June’s six-month high of 52.8 and slightly above estimates of 51.9. The PMI has now signaled expansion for 37 consecutive months. The main factor underlying the drop in the headline index was a softer positive contribution from new order growth. Although the rate of job creation came lower, it remained among the fastest registered over the past five years. This partly reflected further solid growth in production volumes, which held steady at June’s six-month peak. Exports also improved, although at a slightly slower pace, in part supported by the weak Euro exchange rate. The downside of a weaker Euro directly affected an increase in import costs, alongside higher oil prices, led to the first increase in average purchase prices for a year.

Austria and the Netherlands were the best performers and also saw marked expansions during July. In Austria’s case this reflected a slight deceleration from the recent highs in output and new order growth achieved in June, whereas the Netherlands posted mild accelerations. Both nations registered quicker rates of job creation. The upturns in Italy and Spain lost momentum during July, with the Italian and Spanish PMI hitting 18 and 31-months lows respectively. Italy reported weaker increases in production, new orders and employment.

UK Construction PMI beat expectations
UK Construction PMI signaled a further downturn in construction output for the month of July. Construction Purchasing Managers index indicated a 45.9 level in July, slightly down from 46.0 in June and below the 50.0 threshold for the second month running. In parallel, new order volumes fell at a slower pace than the three-and-a-half year low seen in June. Economists had suggested that economic uncertainty following the EU referendum was the main factor weighing on business activity in July, especially in the commercial building sector. There were also reports however suggesting that demand patterns had been more resilient than expected, and some firms linked new enquiries from international clients to exchange rate depreciation.

BoE cuts interest rates

The Bank of England cut its interest rates for the first time in more than seven years and will restart the printing press after the “Brexit” vote. Officials, led by Governor Mark Carney, slashed their growth forecasts by the most ever and voted unanimously to reduce the benchmark by 25 basis points to a record-low 0.25%. While saying they had scope to do more if needed, including taking the interest rate close to zero, they also announced a plan to lend as much as 100 billion pounds to banks to ensure the measures reach the real economy. The Monetary Policy Committee’s measures include a plan to buy 60 billion pounds of government bonds over six months, as much as 10 billion pounds of corporate bonds in the next 18 months and a potential 100 billion-pound loan program for banks.

According to the governor Carney, “We took these steps because the economic outlook has changed markedly, Indicators have all fallen sharply, in most cases to levels last seen in the financial crisis, and in some cases to all-time lows.” On the topic of negative interest rates, he said. “I’m not a fan of negative interest rates,” noting that they had produced “negative consequences” elsewhere.

As mentioned above, growth forecast for next year were cut to 0.8% from 2.3% and lowered its 2018 prediction to 1.8% from 2.3%. According to the BoE report, “recent surveys of business activity, confidence and optimism suggest that the UK is likely to see little growth in GDP in the second half of this year.” This year’s growth forecast was left unchanged at 2%. For the current quarter, the BOE predicts an expansion of just 0.1%.


The RBA lowers cash rate to all-time low
The Reserve Bank of Australia lowered the cash rate to an all-time low by 25 basis points to 1.5% as expected by most market participants. This is the second easing this year as it seeks to defend the economy from deflation and restrain a currency that’s too strong. The RBA maintained that the economy continues to grow “at a lower than average pace”. And, “recent data confirm that inflation remains quite low”.

In its quarterly statement, the RBA predicted annual growth of 2.5 to 3.5% through December, accelerating to around 3 to 4% in 2018. Core inflation was expected to remain below the 2% for most of the forecast period through 2018. While the RBA forecasts the currency to remain at current levels, “it represents a significant source of uncertainty” given its potential to react to changed growth outlooks, commodity prices and policy decisions at home or abroad. China, also “remains an important source of uncertainty” from a possible slowdown in the property market to how authorities balance supporting growth while enacting disruptive reforms.

Chinese manufacturing activity grew for the first time in seventeen months in July as output and new orders increased. Output hit a two-year high and new orders expanded at the fastest pace in seventeen months due to a stronger domestic demand. The Caixin China General Manufacturing PMI came in at 50.6 for July, up significantly by 2.0 points from the reading in June, marking the first expansion since February 2015. The sub-indexes of output, new orders and inventory all surged past the neutral 50-point level that separates growth from decline. This indicates that the Chinese economy has begun to show signs of stabilizing due to the gradual implementation of active fiscal policy.


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