Graeme Wearden 

US jobs report beats forecast, but German factory orders slide – as it happened

Non-Farm Payroll report beats expectations, but wage growth remains tepid
  
  

Construction workers on the Arlington Memorial bridge over the Potomac River in Washington DC
Construction workers on the Arlington Memorial bridge over the Potomac River in Washington DC Photograph: Erik S. Lesser/EPA

Summary

Time for a recap:

  • The dollar has risen, driving the pound down below $1.25 to its lowest rate in six months.
  • But the economic clouds over the eurozone have darkened, after German factory orders reported slumping orders.
  • German industrial orders fell by over 2% in May, and were a shocking 8.6% weaker than a year ago. It’s another sign that the US-China trade war is hurting Europe’s economy.

That may be all for today. Thanks for reading, and have a lovely weekend. GW

Updated

Alastair Neame, senior economist at the CEBR thinktank, believes the White House will get its interest rate cut soon:

Today’s boost to overall job numbers may just about be enough to stay the Fed’s hand for the time being as trade tensions between the US and China have cooled since the G20 summit last week.

Nevertheless, an uptick in the unemployment rate and the absence of faster wage growth indicate that the Fed are still more likely than not to act before the end of the year.

Kudlow: Things are looking good (but Fed should cut interest rates)

Larry Kudlow, White House Economic Advisor, has welcomed today’s jobs report.

Kudlow has told Bloomberg TV that job creation was solid in June, wages kept rising at over 3% per annum, and the unemployment rate is still low (3.7%, up from 3.6%).

He argues that the Trump administration’s “supply-side policies” (deregulation and tax cuts) are working.

We are still in a very strong prosperity cycle. It’s a growth cycle, it’s a prosperity cycle.

Kudlow then cites the vision of “Life, Liberty and the pursuit of Happiness” stated in the American Declaration of Independence

Things are looking pretty good.

But despite being “very optimistic”, Kudlow reckons the Federal Reserve should cut interest rates.

He cites low US inflation, and the weak global economy, as justification for an “insurance rate cut”.

Wall Street drops in early trading

Ding ding! Wall Street has opened in the red.

The Dow Jones industrial average has shed around 100 points, or 0.4%, as traders rethink the chances of sharp interest rate cuts.

The broader S&P 500 index has shed 0.5%, dropping back from its record highs earlier this week.

Traders are concluding that good news is bad news -- ie, a strong jobs report means less chance of central bankers easing monetary policy.

Pound hits six-month low

Oof! The surge in the US dollar has dragged sterling down to a six month low, at just above $1.25.

As you can see, Brexit worries have been pulling the pound down in recent weeks.

Alex Hunter of Capital Economics reckons today’s jobs report means the Federal Reserve won’t cut interest rates this month - and will wait until the autumn.

He writes:

The 224,000 gain in non-farm payrolls in June was much stronger than the consensus estimate of 160,000 and would seem to make a mockery of market expectations that the Fed will cut interest rates by up to 50bp late this month. Employment growth is still trending gradually lower but, with the stock market setting new records and trade talks back on (for now at least), the data support our view that Fed officials are more likely to wait until September before loosening policy.

Admittedly, the headline payrolls gain was flattered by a 33,000 jump in government in employment, with private payrolls rising by a slightly more modest 191,000. Even that was far stronger than most had been expecting, however, with hiring in the business services and education sectors leading the charge.

More reaction to the jobs report:

Gold is another casualty of this strong jobs report:

Edward Moya of trading firm OANDA is confident that America’s Federal Reserve will cut US interest rates later this month, even though the jobs market looks solid.

Today’s non-farm payroll shows labor market is still getting tighter despite the unemployment rate ticking higher from the 49-year low as the participation rate rose. Trade tensions are not really hitting the labor market yet, but lack of international investment in the US will eventually hit the data points. The Fed never makes a decision off of one economic data point and the narrative remains inflation is subdued, and global growth concerns are heightened.

Despite the strong rebound in jobs and steady wages, the Fed will still likely deliver a 25-basis point insurance cut at the end of the month.

Strong jobs report calms fears of US recession

Richard Flynn, UK Managing Director at Charles Schwab, agrees that the US labor market looks strong...but there’s still plenty to worry about.

“Today’s healthy job numbers have exceeded market expectations and show renewed momentum following last month’s weak performance, which should be enough to calm fears of a near-term recession.

“Nonetheless, investors still face uncertainty around slowing global economic growth and an ongoing U.S.-China trade war, despite assurances at the G20 that talks would resume. Economic data has yet to reflect a significant impact from trade concerns, but that’s unlikely to last if the stalemate drags on, or another round of tariffs is imposed.

“Equity markets may have breathed a sigh of relief for now, but this is by no means the end of the trade war drama. A highly anticipated interest rate cut later this month could result in a welcome spike in borrowing and business investment, but the burning question is whether the Fed has sufficient ammunition to offset a slowdown, if and when it arrives.”

The US dollar is rallying - another sign that investors think this jobs report is too strong to justify a massive interest rate cut this month.

The Federal Reserve is still expected to cut borrowing costs, but probably only by 0.25%.

Updated

Shares and bond prices fall

Investors are reacting to the Non-Farm Payroll report by selling bonds, and preparing to ditch shares when Wall Street opens in 45 minutes.

Why such a negative reaction, when job creation has gone up? Because they reckon it takes some pressure off the Federal Reserve to cut interest rates twice this year, as some had hoped.

There was widespread job creation across America last month, according to today’s Non-Farm Payroll report.

The Labor Department says:

  • Professional and business services added 51,000 jobs in June
  • Employment in health care increased by 35,000 over the month and by 403,000 over the past 12 months.
  • Job growth occurred in ambulatory health care services (+19,000) and hospitals (+11,000).
  • Transportation and warehousing added 24,000 jobs over the month and 158,000 over the past 12 months.
  • Couriers and messengers (+7,000) and in air transportation (+3,000).
  • Construction employment continued to trend up in June (+21,000), in line with its average monthly gain over the prior 12 months.
  • Manufacturing employment edged up in June (+17,000),

The US unemployment rate has inched up to 3.7%, from 3.6% in May.

That may be due to more people looking for work -- the labor force participation rate has risen to 62.9% from 62.8%.

Wage growth remains disappointing, though.

Average earnings rose by 0.2% in June alone, weaker than the 0.3% expected. That means wages were 3.1% higher than a year ago, not 3.2% as hoped.

US economy created 224,000 jobs in June

NEWSFLASH: The US economy created 224,000 new jobs in June, more than expected, as job creation bounced back after slowing in May.

More to follow....

Excitement is building.... partly because Non-Farm Payroll is notoriously hard to predict (and notoriously often revised in future months).

Stephen Hubble, Chief Analyst at Centtrip, points out that the latest survey of private sector job creation (from ADP) was disappointing earlier this week.

Today’s non-farm report may confirm that the US labour market is going through a rough patch, he says:

“If the NFP release follows the ADP number and comes in below the forecast of 165,000 jobs added, that will shake the Dollar and will strengthen the case for an interest rate cut by the Federal Reserve later this month.

The impact could be even more pronounced as the US has just celebrated the Independence Day and traders will inevitably be taking vacations, so lower liquidity can often lead to higher volatility in markets.”

Markets brace for US jobs report

Tension is mounting in the markets as investors prepare for the monthly US jobs report, due in half an hour.

The Non-Farm Payroll is expected to show that job creation picked up in June. On average, analysts predict the NFP rose by around 162,000, up from a disappointing 75,000 last month.

Kit Juckes of Societe Generale says:

The impression that employment growth has slowed will only be challenged by a real barnstormer of a figure, that would contrast with what we’re seeing in other labour market indicators.

Economists will all scrutinise the latest earnings data. They’re expected to show that average wages rose by 0.3% in June, up from 0.2% in May, lifting annual wage growth from 3.1% to 3.2%.

A weak jobs report increases the chances that the Federal Reserve cuts interest rates later this month. It would also reinforce concerns that the global economy is weakening.

FXPro analysts predict that the markets could be volatile once the data is released at 8.30am East Coast time (or 1.30pm in the UK).

Markets quietened down in anticipation of the US Nonfarm Payrolls: there is a danger that this lull will be like a compressed spring that will shoot after the data is published.

Here’s a round-up of the latest forecasts.

Shares in German industrial giants have fallen this morning, as investors fret about the slump in orders.

Manufacturing conglomerate Siemens is leading the fallers, down 3.2% this morning, followed by engineering and steel giant Thyssenkrupp (-2%), material science group Covestro (-1.9%) and building materials group HeidelbergCement (-1.8%).

This has pulled the DAX index of top German companies down by 0.3% so far today.

This morning’s slump in German factory orders continues to worry economists and investors.

Many fear that Europe’s largest economy is weakening. Here’s more reaction:

Productivity crisis costs workers £5,000 per year

Britain’s productivity problems have had a severe impact on wage growth.

According to the ONS, the average worker would be earning £5,000 per year more, if productivity had maintained its pre-crisis growth rate, rather than being so weak over the last decade.

That’s because, before the financial crisis, productivity was growing at 2.3% per year.

Had it remained at that rate, productivity would be 28% higher than it is today.

Jack Leslie, Policy Analyst at the Resolution Foundation, explains:

“UK productivity fell again in early 2019, continuing the falls seen in the second half of 2018. This is very disappointing for the economy, and deeply worrying for people’s living standards prospects.

“Labour market productivity is now almost 30 per cent below the pre-crisis trend. This dismal record has been the single biggest driver of the stagnation in living standards over the last decade.

“Addressing the UK’s productivity slump is as important, and not unrelated to, addressing Brexit.”

Updated

How are business leaders supposed to commit to major project when they don’t know how Brexit will be resolved?

That’s the message from Tej Parikh, chief economist at the Institute of Directors, who blames political uncertainty for Britain’s productivity woes:

“The UK’s dire productivity performance shows no signs of letting up.

“With political risks clouding business decisions, firms have lacked the confidence to invest in the equipment and technology that drive efficiency gains in their organisations. Even if the clouds of uncertainty do lift later this year, it will be a while before pent-up investment activity filters through to the productivity numbers.

“While the Conservative leadership candidates’ Brexit and personal tax policies have grabbed the headlines, business leaders also want to see urgent progress on our skills agenda, infrastructure, and business support. Boosting the UK’s productivity growth is the only way to deliver long-lasting increases to wages and living standards across the country.”

This chart highlights that UK productivity weakened because British workers collectively worked 2% more hours in January-March, but only boosted output by 1.8%.

Britain’s productivity woes are partly caused by companies taking on low-paid staff, rather than splashing out on better equipment, says Howard Archer of EY Item Club:

Part of the UK’s recent poor labour productivity performance has undoubtedly been that low wage growth has increased the attractiveness of employment for companies.

It is apparent that many companies have preferred to take on labour rather than commit to costly investment, given a highly uncertain economic and political outlook, magnified by Brexit since mid-2016. The low cost and flexibility of labour relative to capital has certainly supported employment over investment.

UK productivity falls again

Bad news! Britain’s productivity has fallen for the third quarter in a row.

Labour productivity (how much output was created for each hour of work) shrank by 0.2% in the first quarter of 2019 compared with the previous year, according to the Office for National Statistics.

That follows a 0.1% year-on-year decline in October-December, and is the third contraction in a row.

The ONS says that manufacturing productivity tanked by 0.9%, while the service sector achieved a 0.2% jump in productivity.

Weak productivity is often a sign that companies haven’t been investing in new equipment, perhaps because they’re nervous about economic prospects while Brexit is unresolved.

The slump in German factory orders has dampened the mood in the markets.

The main European indices are all down slightly, as investors ponder whether central banks will unleash their firepower soon to prop up growth.

In London, mining companies such as Anglo American (-2.4%) and Rio Tinto (-2.3%) are leading the fallers; weak factory output means less demand for raw materials.

Russ Mould, investment director at AJ Bell, explains:

The big news of the day is the sharp decline in German factory orders, down 2.2% in May versus estimates for a 0.2% decline. This will worry the European Central Bank and raise expectations of more monetary stimulus in the near future.

“In the UK, the FTSE 100 fell 0.2% to 7,590 with miners sinking on renewed concerns about the global economy and how that might impact commodities demand. Rio Tinto, Anglo American and Evraz were among the biggest fallers on the FTSE 100. Housebuilders were also out of favour.”

German factories aren’t the only ones struggling.

New data shows that Asian factories suffered a sharp downturn last month. Industrial goods production across the region shrank at the quickest pace in nearly seven years, data firm Markit reports.

Metals and mining output also declined in June, at the sharpest rate since January.

This is another sign that the global economy has weakened recently. More here.

Understatement of the morning:

While German factories struggle, UK industry can celebrate good news -- Jaguar Land Rover has just confirmed it will build an electric version of its Jaguar XJ saloon at its Castle Bromwich factory.

Bloomberg is worried that global trade uncertainty is driving Europe’s economy into a “more serious downturn”.

The German economy ministry reported huge declines in export orders and investment goods in May, just days after a survey showed factory activity shrank for a sixth month in June.

The continued gloom is increasing concern at the European Central Bank, and a growing number of economists are predicting it will add more monetary stimulus as soon as this month.

This slump in factory orders is bad news for Germany’s economy, says Katharina Utermöhl, senior economist for Europe at Allianz SE.

She is worried that global trade tensions (with the US and China yet to resume negotiations) are hurting:

In particular, the outlook for foreign demand has deteriorated considerably. The tentative spring recovery in global trade has thus turned out to be very short-lived. In view of the lingering trade uncertainties and elevated inventory levels, a swift recovery for German industry is not in the cards. Germany’s export economy, which is strongly geared to industrial goods, will clearly remain under pressure.

So far, domestic demand has been holding up relatively well, but it is only a matter of time before the weakness in industry also affects investment activity and consumption in a more pronounced manner. Overall, we expect GDP growth for Germany of only 0.8% in 2019.

This chart also shows that consumer demand has propped up orders:

ING: This is devastating

Carsten Brzeski of ING is aghast to see that German factory orders have shrivelled so badly in May.

He writes:

The great order book deflation continues. Devastating new orders data just undermined any hopes for an industrial rebound. We are starting to lose our optimism. Instead, the order book deflation just reached a new standard.

In May, new industrial orders dropped by a painful 2.2% MoM, from a slightly upwardly-revised 0.4% MoM increase in April. After two positive months and hopes for a bottoming out, the downward slide is back again. On the year, new orders were down by 8.6%; the worst YoY drop since 2009.

Brzeski points out that other German economic data has weakened too:

Combined with the weakest June performance of the labour market since 2002 and disappointing retail sales, today’s new orders wrap up a week to forget for the German economy. The fear factor is back.

John Hardy of Saxo Bank fears that Germany’s economy is in recession:

This tumble in German factory orders suggests its economy struggled in the last quarter, warns Oliver Rakau of Oxford Economics:

German factory orders slide again

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

Alarm bells are flashing over the German economy this morning, after its factories suffered another slump in orders.

German industrial orders shrank by 2.2% month-on-month in May, new figures show, much worse than the 0.1% fall expected.

On an annual basis, orders were a shocking 8.6% lower than in May 2018, which appears to be the weakest reading since 2009, during the financial crisis.

Destatis, the German statistics body, reports that German firms suffered a sharp slump in overseas orders:

Domestic orders increased by 0.7% and foreign orders fell by 4.3% in May 2019 on the previous month. New orders from the euro area were down 1.7%, new orders from other countries decreased 5.7% compared to April 2019.

Germany’s factories are an important bellwether for global demand, so this may show that the US-China trade war is causing more damage to the world economy.

Demand for expensive equipment and machinery (known as capital goods) was particularly poor, suggesting companies are too nervous to commit to major spending decisions.

Destatis explains:

In May 2019 the manufacturers of intermediate goods saw new orders fall by 1.5% compared with April 2019. The manufacturers of capital goods showed decreases of 2.8% on the previous month. For consumer goods, a decrease in new orders of 0.7% was recorded.

City experts are alarmed - such weak data suggests Germany’s economy is in trouble, and that’s a bad sign for the eurozone economy as well.

More reaction to follow!

Also coming up today

The latest US jobs report will show whether employment growth bounced back last month, after slowing sharply in May. A poor reading might increase fears that America’s economy is slowing..... and also increase pressure to cut US interest rates soon.

While in the eurozone, Greece is preparing to head to the polls this weekend in a general election which could end Alexis Tsipras’s time as prime minister. The right wing New Democracy have a chunky lead in the opinion polls, ahead of Tsipras’s left-wing Syriza party.

The agenda

  • 8.30am BST: Halifax’s UK house price survey for June (expected to show prices fell by 0.4%)
  • 1.30pm BST: US non-farm payroll for June (expected to show 160,000 new jobs, up from 75,000 in May)

Updated

 

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