A Look at the Economy 7.7.14
Last Week
The most-important thing that happened last week was that the June jobs report and the June ISM manufacturing and non-manufacturing PMIs further implied the US economy is close to achieving “escape velocity” (meaning ending the era of around 2% GDP growth).
Other than the obvious (that an accelerating economy is good for stocks), the strong data and implication that we’re finally breaking out of this slow-growth economy is key for two reasons:
First, the strong data of the past few weeks are helping to remove any worry about the economy being able to recover from the Q1 hole. Second, the debate about whether the Fed is “behind the curve” (which is a term that just means the Fed may be too accommodative at this point, given what appears to be happening in the economy and with inflation) was reignited last Friday. If the market starts to believe the Fed is behind, look for inflation-linked assets/sectors to outperform going forward.
Turning to the data, ISM manufacturing and non-manufacturing PMIs actually slightly missed estimates last week. (Manufacturing: 55.3 vs. (E) 55.6, Non-Manufacturing: 56.0 vs. (E) 56.2.) Regardless, both were strong numbers and solidly above the 50 level that implies expansion.
And, the June jobs report was a blowout of 288K vs. (E) 213K. And, beyond the June report, for the first six months of 2014 we’ve seen average monthly job gains of 231K—which is the best 6-month stretch since the crisis of 2008. Additionally, the unemployment rate fell to 6.1% while the labor participation rate remained at 62.8% (meaning the unemployment rate likely declined because unemployed people found jobs, not because they dropped out of the labor force).
Bottom line is last week was an important week of data, and it implied that economic growth is accelerating. While last week’s data alone won’t result in a material change in Fed policy expectations, it does put some more pressure on the Fed to begin to explain their exit strategy. For now, we remain in a sweet spot of an easy Fed and accelerating growth. But if things continue at this pace, Fed outlook will have to change—but that’s a problem for another day.
Last week wasn’t all about the U.S., though, as there were also a lot of global data. The biggest positive surprise came from China, as both the private Markit and government June manufacturing PMI were above 50, while June service sector PMI in China surged to 53.1, up from 50.7 in May. Bottom line is the PMIs, along with other recent data, confirm that the pace of growth of the Chinese economy has stabilized above 7%, which is a general tailwind for global markets and the economy.
Finally, turning to Europe, there were a ton of data last week (flash June HICP, June manufacturing and composite PMIs, retail sales and an ECB meeting). Bottom line on all of it is that while there are some pockets of weakness (German data have been a bit soft the last few weeks, which is disconcerting), the consensus is that the slow recovery in Europe is continuing. The ECB, as expected, made no changes to policy and will wait to see the effectiveness of the June measures before moving again.
This Week
It is a very quiet week economically for both the U.S. and the rest of the world. Jobless claims (Thursday) is the only number to watch here in the U.S., while internationally the “highlight” will be Chinese CPI/PPI (tomorrow night) and trade balance (Thursday). Inflation is always a concern in China, because an uptick in inflation will cause the government to pull back stimulus (which puts economic growth at risk). But no one is expecting a major uptick in inflation this week.
In Europe it’s also quiet (the biggest number of the week was German industrial production, which we got this morning). The Bank of England meets Thursday, but there will be no change to policy. And, seeing as the BOE makes no statement at its rate meetings (unlike the Fed or ECB), this will be a non-event. After a very busy holiday-shortened week, last week, we generally get a break economically over the next several days.