- Unemployment claims remain in good shape
- PPI expected to remain tame
- China Q2 CPI expected to ease slightly to a new 7-year low of +6.6%
- BOE expected to cut rates today
Unemployment claims remain in good shape — The U.S. unemployment claims series both remain in good shape and indicate that layoffs remain at very low levels. The initial claims series is only +6,000 above the 42-3/4 year low of 248,000 posted in April. Meanwhile, the continuing claims series is only +12,000 above the 1-1/2 year low of 2.112 million posted in late May. The market is expecting today’s initial claims series to show a +11,000 rise to +265,000, reversing part of last week’s -16,000 decline to 254,000. The market is expecting today’s continuing claims series to show a +6,000 rise to 2.130 million, reversing part of last week’s -44,000 decline to 2.124 million.
On the labor front, the markets last Friday were greatly relieved to receive the news that June payrolls rose by +287,000, far stronger than market expectations of +180,000. The June payroll report indicated that job hiring had not fallen off a cliff with May’s payroll report of a revised gain of only +11,000. Still, the 3-month (April-June) monthly average of +147,000 is relatively weak and is well below the 2015 average of +229,000. The downshift in hiring growth is not surprising given that the U.S. is approaching full employment and given that there is not much impetus for aggressive hiring given tepid U.S. and overseas economic growth. In addition, businesses have some disincentives for new hiring due to poor labor productivity and higher wages and due to the need to cut expenses during the year-long profit recession.
PPI expected to remain tame — The market is expecting today’s June final-demand PPI report to be unchanged from May at -0.1% y/y and the June core PPI to ease to +1.0% y/y from +1.2% in May. The June U.S. inflation indexes in general are expected to remain tame and are not expected to put any new pressure on the Fed to start raising interest rates.
The Fed’s preferred inflation measure, the PCE deflator, rose by only +0.9% y/y in May and the core PCE deflator was up by +1.6% y/y, both well below the Fed’s +2.0% inflation target. The CPI is in stronger shape, but the Fed pays more attention to the PCE deflator. The May CPI rose by +1.0% y/y and the May core CPI rose by +2.2% y/y.
Meanwhile, market-based measures of inflation expectations remain tame. The 10-year breakeven inflation expectations rate, which measures the difference between 10-year T-note and TIPS yields, is currently at +1.48%, well below the Fed’s 2.0% inflation target. The downtrend in crude oil prices seen in the past several weeks is helping to put some fresh downward pressure on inflation expectations.
China Q2 CPI expected to ease slightly to a new 7-year low of +6.6% — The market is expecting Thursday night’s Chinese Q2 GDP to ease slightly to +6.6% y/y from +6.7% y/y in Q1. Today’s expected Q2 GDP report of +6.6% would be a new 7-year low.
If the Chinese GDP figures could be relied upon, the markets wouldn’t be particularly worried about a slight decline in Chinese GDP to +6.6%. However, most observers believe that Chinese GDP has actually slowed to the 4-5% area or even lower. Indeed, the quarter-on-quarter figure of +1.1% in Q1 translates to an annualized quarterly increase of only +4.4%, far below the year-on-year figure of +6.7%. The market is expecting today’s Q2 quarter-on-quarter figure at +1.6%, which translates to an annualized increase of about +6.4%, still below the expected year-on-year figure of +6.6%.
BOE expected to cut rates today — The market is widely expecting the Bank of England at its policy meeting that ends today to announce a 25 bp rate cut to 0.25% from the 0.50% level that has prevailed since 2009. The rate cut is preemptive in the sense that the BOE wants to bolster consumer and business confidence before a downward spiral can develop in reaction to the June 23 Brexit vote. The British pound has already plunged on expectations for fresh BOE easing moves to address the Brexit fallout.
The good news on the Brexit front is that Theresa May became Prime Minister yesterday, averting a leadership battle that would have lasted until September. Ms. May can now get on with developing a Brexit negotiating plan and at least slightly reduce market uncertainty. Ms. May has yet to provide an update on when she might trigger the Article 50 notification to the EU that Britain is leaving the EU. The sooner Ms. May triggers Article 50, the better for the markets since the clock will then start on the 2-year negotiation period for the UK to negotiate an exit. If there is no exit agreement, then the UK will simply be expelled from the EU without further ado.
It would be worse for the markets if Ms. May drags out the Article 50 notification as a negotiating tactic while the UK tries to negotiate informally with the EU without triggering the 2-year deadline. However, German Chancellor Merkel, sensitive to that negotiating tactic, has already said there will be no informal negotiations until the UK has triggered the Article 50 notification. Ms. May said several weeks ago that she did not anticipate triggering Article 50 this year. The new UK government needs some time to at least organize a negotiating position on Brexit since the Brexiteers going into the June 23 had absolutely no plan for what to do if they won and have since been in complete disarray.
