Believe it or not, we just finished a week where Greece did not dominate the headlines. Instead, focus turned towards U.S. economics and monetary policy in a number of countries, including China. Canadian markets started with positive momentum thanks to a much better than expected U.S. ISM Manufacturing Index print that was posted while we were all celebrating Canada Day last week.
That print also set a positive tone for American investors who returned to the market after their Independence Day holiday on Monday. The tone was only amplified by a materially better than expected ADP employment report on Wednesday that suggested 157,000 private jobs were created in the U.S. when economists were only looking for 70,000. Unfortunately the positive momentum would come to an end on Friday when conflicting employment data from the Bureau of Labor Statistics showed that only net 18,000 jobs were created last month when economists were looking for 105,000 and private job growth produced 57,000 jobs when 132,000 were expected.
These prints cast doubt on whether or not the “soft patch” the U.S. economy may have been experiencing was coming to an end. U.S. lawmakers also spent the last week trying to hammer out a new debt ceiling package, but as expected words were exchanged with little to show for it. We don’t anticipate a resolution to the U.S. debt problem until much closer to the August 2nd deadline.
While monetary policy may not have been in focus in North America, it was very topical in China where the central bank increased interest rates for a third time this year by 25 basis points in an attempt to keep inflation under control.
Elsewhere, the Bank of England decided to keep interest rates unchanged at 0.5% as the U.K. continues to post sluggish economic data after recent budget cuts were put into place. And the European Central Bank actually followed the lead of the Chinese by moving interest rates higher by 25 basis points to 1.50%, also in an attempt to keep inflation in check. While a number of European countries are struggling, Germany, the big powerhouse is actually performing reasonably well considering the global economic environment.
The Trading Week Ahead
Now that another quarter has come to an end and investors have had all the economic data they can handle, focus will likely move back to corporate earnings next week as Alcoa will kick off Q2 earnings season on Monday with its report after market close. Not to be outdone JPMorgan Chase, another Dow component, will report earnings in addition to tech heavyweight Google. Canada’s Q2 reporting season normally doesn’t ramp up until later in the month, but we will see earnings for the calendar second quarter for Nexen on Thursday.
If economic data does hit the headlines next week, inflation will likely be the topic, as we will see both Producer Price and Consumer Price Indices in the United States while China will release its inflation metrics over the weekend. Economists expect Chinese inflation to rise from 5.5% in May to 6.2% in June. The Chinese will also release their usual monthly statistics later next week and will report Q2 GDP on Tuesday where economists are expecting year-over-year growth of 9.3% Oil prices took a step back after today’s employment report and commodity prices in general could be under the microscope next week as economists continue to debate whether we’re currently seeing temporary slowdown or a longer term downturn in the United States.
However, such a debate should continue to support precious metal prices as both gold and silver turned positive when the jobs data was released. Finally the Canadian dollar has strengthened considerably since the end of July as oil prices rebounded from their recent sell off and Canadian GDP figures have been better than expected. Today’s employment report helped support the loonie, but currency traders did not like the U.S. job report and the possible decline in resource demand that may come with it, causing the Canadian dollar to weaken. We expect this overhang to persist next week as there are few data points expected on the Canadian economic calendar.
Question of the week
What are we to make of this week’s employment data in the United States?
This week we saw two very conflicting labor reports in the United States. The ADP report which tracks private employment came in well ahead of expectations at 157,000 while the Government Non Farm Payrolls only increased by 18,000 when economists were hoping for a number north of 100,000.
As the chart bellow shows, the ADP print has led the Non-Farm Payrolls figure in the past, so perhaps the uptick this week in the ADP report suggests that job creation could rebound in the second half of the year. However, regardless of which statistic was correct this week, what the employment data does tell us is that the rate of job creation continues to struggle and private job growth is going to be necessary in the near future as Federal and State governments cut public service jobs.
@Gareth_RGMP