Aussie employment surprises on upside, but global growth concerns remain

Emily Nicol

Amid heightened geopolitical tensions and fears of weaker global growth after the softer Chinese and German data, US and European equities yesterday reversed the gains seen the previous day – the Euro Stoxx 50 closed 2% lower, while the S&P500 was almost 3% lower. As such, equities in the Asia-Pacific region predictably started the day on the back foot. And despite a stronger than expected Aussie employment report (see more details below), the ASX 200 closed 2.9% lower on the day. Japanese data confirming that manufacturing output contracted sharply in June unsurprisingly did little to boost equities – so the Topix was down 1% on the day. In contrast, Chinese equities made modest gains over the day to close 0.3% higher. And the main indices from Hong Kong, Korea and Singapore also posted gains.

Of course, developments in global bond markets attracted most attention with further significant gains in the major markets. Yields on USTs were down 10bps or more, with 10Y yields (currently below 1.55%) falling below 2Y yields for the first time since the global financial crisis and consistent with increased recession fears. And with 30Y yields having dropped almost 15bps yesterday, they briefly fell through 2% for the first time. In Japan, ahead of the BoJ’s scheduled purchase of 5-10Y JGBs tomorrow, there was further yield curve flattening, with 10Y yields falling 1bp to -0.24% and 30Y yields down 3bps to 0.16%.

Despite an upside surprise to UK inflation yesterday and reports overnight that Labour leader Jeremy Corbyn had approached leaders of other opposition parties to propose tabling a no confidence vote in Boris Johnson’s government and then form a ‘time-limited temporary government’ with the aim of extending Article 50 to avoid a no-deal Brexit on 31 October before calling a general election, there was further curve flattening in the UK, with 10Y Gilt yields having fallen to just 0.44%, and so also below 2Y yields for the first time since 2008. Looking ahead, today’s UK retail sales are likely to add to the negative tone, while a busy day for US top-tier releases – including July retail sales and IP data – might also prove to be market moving.

Japan’s final industrial production data for June were not quite as downbeat as the preliminary estimates, although still confirmed the weakest monthly growth in seventeen months. In particular, overall output fell 3.3%M/M in June, compared with the initial estimated drop of 3.6%M/M. So, while this still left IP down a sizeable 3.8%Y/Y, the decline was similarly 0.3ppt softer than the initial reading. As such, the increase over the second quarter as a whole was also a touch firmer than previously thought, although the 0.7%Q/Q increase was still insufficient to offset the 2½%Q/Q decline in the sector in Q1.

The detail of the IP report showed that all major sub-sectors reduced production in June. While there was a slightly softer pace of decline in production of autos than initially estimated, it was still down a hefty 8½%M/M. Output of ICT equipment, meanwhile, was still down an unrevised 10½%M/M. And production of general machinery was down a slightly steeper 1½%M/M. There was also a larger drop in shipments in June than in the flash estimate, with the 4%M/M decline the steepest since January 2018. So, given another modest rise in inventories, for the fourth month out of the past five, the inventory shipment balance jumped to its highest level in a decade, suggesting limited prospects for a near-term boost in manufacturing output.

With developments in the labour market set to remain central in determining the near-term path of RBA monetary policy, today’s Australian jobs report was closely watched. But while this revealed stronger employment growth at the start of Q3 there was evidence that still large amounts of spare capacity remain in the labour market. Admittedly, the employment figures attracted most attention, rising a stronger-than-expected 41k in July, although this followed a drop of 2k in June. As such, the total number of people employed was up an impressive 333k compared with a year earlier. And this improvement principally reflected full-time employment, which increased for the third consecutive month and by a larger 33k, leaving it more than 250k higher than a year earlier.

But with the labour force participation rate rising to a new record high of 66.1%, the unemployment rate moved sideways at 5.2%, admittedly a touch below the trend rate but still significantly higher than the RBA’s central estimate of the equilibrium rate (4½%). Meanwhile, the underemployment rate rose 0.2ppt to 8.4%. Therefore, upwards pressures on wage growth look set to remain absent for a while yet, and in the absence of new momentum, the RBA’s inflation target seems highly likely to remain elusive too. As such, while the market implied probability of a rate cut at September’s policy meeting has fallen back to around 25% after today’s report, we continue to expect at least one further 25bps rate cut before the end of the year.

The data focus in the UK today will be on retail sales figures for July. But while prices on the high street have declined over recent months, surveys suggest that retail sales weakened at the start of the third quarter – indeed, sales are expected to have declined ½%M/M, albeit only partly offsetting the increase in June.

It will be a busy day for US top-tier releases, including industrial production and retail sales figures for July, Q3 productivity and labour costs data, the Philly Fed, Empire Manufacturing and NAHB housing market indices for August as well as business inventories numbers for June. While retail sales look set to have had a solid start to the third quarter, manufacturing production is expected to have largely reversed the gain seen at the end of the second quarter.

Euro area:
In the euro area, developments in financial markets are likely to remain the focus, with no economic data of note due from the euro area or its larger member states.

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