The other highlight of the week was the Bank of England’s meeting. The BoE reiterated its transitory view of current inflation and raised its growth and CPI forecasts as well as lowering its unemployment forecast. Another important change was lowering the trigger level for taper to a 0.50% policy rate hurdle, down from 1.50%, and to actively sell assets, down to 1%.
In Asia, the week opened to Chinese manufacturing PMI data printing a little weaker and services PMI much stronger
Employment data was good, but not as strong as expected at +94.0k (150.0k exp., 230.7k prev.) The unemployment rate dropped to +7.5% (7.4% exp., 7.8% prev.) and the participation rate held steady, at +65.2% (65.5% exp., 65.2% prev.) The manufacturing PMI was steady, at 56.2 (56.5 prev.)
The ISM disappointed, however the components were all expansionary with manufacturing at 59.5 (61 exp., 60.6 prev.), prices paid at 85.7 (89 exp., 92.1 prev.), new orders at 64.9 (64.2 exp., 66 prev.), employment at 52.9 (51.7 exp., 49.9 prev.) and services at 64.1 (60.5 exp., 60.1 prev.). Continuing claims moved lower to 2930k (3255k exp., 3269k prev.) hinting at a better jobs market, which the ADP number did not confirm, at +330k (690k exp., 692k prev.)
So, the final say on jobs data was left to Friday’s payrolls data, which proved to be positive, with nonfarm payrolls at 943k (870k exp., 850k prev.) & a 2-month net revision of +119k; private payrolls +703k (709k exp., 662k prev.). The unemployment rate beat expectations, at +5.4% (5.7% exp., 5.9% prev.) and the participation rate ticked up to +61.7% (61.7% exp., 61.6% prev.) Finally, the underemployment rate dropped to +9.2% (9.8% prev.), a level last seen in Jan 2017.
In speeches, some FOMC members indicated that between 1 to 4 more similar numbers would be sufficient to start tapering.
Retail Sales just missed expectations, at +1.5% MoM (1.7% exp., 4.6% prev.) resulting in +5.0% YoY (4.4% exp., 9.0% prev.) French industrial and manufacturing production were weaker than expected but private payrolls were stronger. German data was collected before the devastating floods, so may not be representative of the most recent economic evolution. Retail sales were strong +4.2% MoM (2.0% exp., 4.2% prev.) and +6.2% YoY (3.0% exp., -2.4% prev.) as were factory orders with only industrial production coming in a weaker. Italian PMIs were all expansionary, but weaker than forecast. Retail sales disappointed at +0.7% MoM (1.9% exp., 0.2% prev.) and +7.7% YoY (13.3% prev.) and industrial production was close to expectations.
Norwegian manufacturing PMI was strong. Swedish PMIs were strong.
Consumer confidence ticked up and core CPI (Tokyo) was flat 0.0% YoY (0.0% exp., 0.0% prev.)
The Bank of England held QE unchanged and policy rates at +0.1% (0.1% exp., 0.1% prev.). In the subsequent press briefing Governor Bailey said that the size of the bank’s bond portfolio should be counter cyclical to the economy and that reinvestment may stop when policy rates reach 0.5% and outright sales may be considered at 1%. Cynical participants viewed this as a ceiling on policy rates – as the balance sheet will never decrease in their eyes. Others took the stance that as negative rates are now a part of the Bank’s policy framework the effective lower bound is now -1% – a consequence of the 1% drop in the previous reinvestment hurdle. Whilst neither stance is completely unreasonable, it is not obvious they are correct either.
To the backdrop of the armed services rolling out to enforce Australia’s lockdown the RBA met and kept QE and policy rates unchanged, the is 3-Yr target at 0.1% (0.1% exp., 0.1% prev.). More significantly though, the Bank’s forward guidance was unchanged with July’s path for a reduced pace of QE, when the current period expires in September, was reiterated. Governor Lowe did mention the flexibility of the program but emphasised that the current level of fiscal support gave the Reserve Bank the ability to look through the effects of the current lockdown.
Jobs data showed the unemployment rate dropping to 4.0% (4.4% exp., 4.7% prev.). This data is stunning, matching the lows of the last decade, but is volatile due to its quarterly released. House Prices also ticked higher +24.8% YoY (22.8% prev.) in opposition to the central bank’s new mandate.