The US job numbers came in right on the screws, with 215K new July jobs enhanced slightly by a +14K net revision to prior months. A lack of obvious wage pressures provided the only real disappointment, particularly coming as it did on the heels of a screwball quarterly ECI print the week before. On the other hand, arguably the single most important metric in payroll reports is the aggregate hours index, which managed a remarkable 0.5% gain, the best figure in almost a year and theoretically equivalent to a whopping 400K additional jobs. Crucially, even without the assist from aggregate hours, the release was sufficiently robust to keep the Fed on track for a September rate hike. We see no reason why next month’s print won’t be in the same range.
Canada’s job numbers are rarely what they seem. The prior month was unusually strong due to massive full-time job creation that trumped a slight decline in overall employment. This July release was the mirror image: modest job creation (+7K) contrasted by a 17K loss of full-time jobs and a 28K loss in private-sector positions. As such, the report warranted a net negative interpretation, even if hourly wage growth did stage a sudden revival. Beneath the surface, the mining, oil and gas sector managed to remain flat on seasonally-adjusted basis, while Alberta shed a moderate 4K jobs. The basic mystery of a middling job market somehow defying economic weakness persists. Four scenarios exist to reconcile the two. The first is that Canadians are becoming drastically less productive. This seems unlikely. The second is that the GDP numbers are misleading – this is not totally inconceivable given that leading indicators are less negative, but is unlikely the main answer. The third is that Canada’s notoriously jittery labour force survey has not yet conveyed the labour market’s pain. All it would take is one of Canada’s intermittent “rogue” reports announcing the loss of 50K jobs to change the interpretation drastically. We are tempted by this answer, especially since Alberta’s EI claims are more sombre than the job figures. The third interpretation is that labour market pain is usually lagged relative to the economy, with the implication of more weakness coming. This would seem to be a “no brainer”, except for the fact that the main round of oil layoffs have long-since been announced and implemented. We are left uncertain on the conclusion, though leaning toward the latter two explanations. The bottom line is that the Canadian job market remains at risk of further weak reports, whether or not Canada ultimately descends into a proper recession.
Oil prices continue to probe the depths, with the price of WTI now below $45.The origin of this move seems to be a mix of dollar strength, Chinese economic weakness, Iranian expectations, unusually high US refinery operations and more bearish speculators.
Looking forward, oil prices may be bottoming. There are several reasons for this. Prices are near their prior low, US oil inventories are now declining sharply (signalling a restored equilibrium at least in the US) and the market has now adequately priced in diminished expectations. While the US rig count has begun to edge higher, it is no less pertinent to observe that the US energy sector laid off 9,050 workers in July – a significant acceleration. Technically, the futures market is the single best predictor of oil prices, and it continues to point higher. Finally, oil prices are well below sustainable levels, suggesting that the ongoing supply adjustment should eventually yield higher prices. All of that said, the reality for now is that of very low oil prices, with several implications. Most obviously, the recent bout of low global inflation should persist for longer, and we have revised down our 2015 inflation forecasts. A key question is how central banks will interpret this development. We are inclined to think in two very different ways. Those with reasonably healthy economies can afford to look through the inflation hit, recognizing that the more important influence is the economic boost that low oil prices provide. Thus, for instance, the Fed is unlikely to delay its coming tightening. On the other hand, for those countries with weak economies (including commodity exporters) or otherwise looking for an excuse to justify additional stimulus, this provides a perfect opportunity.
Chinese data dump
China’s monthly data dump is now underway, with disappointing trade numbers leading the charge. Loan data, retail sales, industrial production, and fixed asset investment remain to be released. Policymaker stimulus should not be underestimated and may be succeeding in (temporarily) stabilizing Chinese housing, but our suspicion is nevertheless that further economic disappointment awaits, based on a clear pattern of Chinese disappointment, the soft Caixin China Manufacturing PMI and sales reports from multinationals.
Eric Lascelles, is chief economist at RBC Global Asset Management