This week's highlights
For the financial markets, the most important economic indicator this week is employment in the US. Employment is one of the indicators used to assess whether the US is in recession, and looking only at the labour market the US is in recession. The following indicators point to this:
- Unemployment has increased by 0.5 percentage point over the past six months which usually only happens in connection with a recession (apart from 1992)
- Private-sector employment has fallen by 0.4% over the past twelve months, and this has not been seen since WWII except when the economy has been in recession
- Notably cyclical sectors such as the manufacturing industry, construction, retail, transportation and business services have cut jobs.
The labour market indicates that there are signs of a mild recession, just like the two previous in 1990/91 and 2001. So far, the unemployment rate has increased by almost 0.1 percentage point a month over the past six months. In comparison, the unemployment rate rose by 0.15 percentage point a month during the recessions in 1990/91 and 2001 and during the more severe recessions in the early 1980s it rose by 0.25 percentage point a month.
Using the moderate rise of 0.1 percentage point as guideline for the future development, the unemployment rate ends the year at 6.1%. A sharper rise of 0.15 percentage point will send the unemployment rate to 6.4%, and a repetition of the development in the early 1980s will result in an unemployment rate close to 7%.
We expect the moderate development to continue, and this means that unemployment for 2008 will end at 6%. This is due to the fact that businesses are in somewhat better shape than usual at the beginning of a recession and that the access to the labour market has slowed down due to the demographic development since the labour force grows at a lower rate. In our view, it will be very unusual if the Fed raises interest rates in this situation.
This week's other highlights
- USA: GDP for Q2, ISM, consumer confidence and house prices
- The euro zone: consumer prices, preliminary
- The UK: PMI Manufacturing
- Japan: industrial production and unemployment
In the course of the week
Germany: consumer prices - July
The German consumer prices rose again in June to 3.3%. The German consumer prices are the first indication of the flash estimate of inflation in the euro zone and will be announced on 31 July. Therefore, the data will attract much attention - considering the ECB's interest-rate announcement on 7 August.
Monday
Japan: unemployment - June
The tight labour market appears to be softening. The unemployment rate was unchanged at 4% in May and confirmed the picture that the fall in unemployment is coming to an end. Moreover, new jobs and vacant jobs per application are on the decline. Economic growth is slowing and profit in the corporate sector is under pressure from the high oil and commodity prices, for instance, which influence the labour market. We expect the unemployment rate to remain around 4% in June since initially businesses will react by reducing bonus payments rather than cutting jobs.
Tuesday
USA: house prices from Case/Shiller - May
There are various measurements of house prices in the US. Case/Shiller measures the price development of homes in the large cities. That is why Case/Shiller often increases/falls more than the entire housing market. In April house prices had fallen by 15.3% over the past twelve months, which is the sharpest fall since the start of the data collection (1988). It is cause for concern that the fall in house prices has accelerated lately. If it is measured in terms of a three-month period and compared with the preceding three months and in y/y terms, the fall is 22%.
We expect a further fall in house prices in May.
USA: consumer confidence - July
Consumer confidence as reported by the Conference Board is usually the most important consumer confidence indicator. Consumer confidence has declined by almost 55 points over the past 12 months, which is the largest fall ever (1968). This reflects the fact that consumers are very much under pressure from falling employment, rising unemployment, high petrol and food rises, falling house prices and equity prices as well as lower wage increases.
Consumer confidence is expected to be affected by the following factors:
- the crisis involving Fannie Mae and Freddie Mac has not added to the optimism
- employment fell again in June and in the previous months
- the Department of the Treasury is almost done sending out cheques with tax cuts
- the turmoil in the financial markets has picked up again and equity prices have fallen
- mortgage rates have increased significantly since mid-March
- petrol prices have increased further
- the other consumer confidence indicators, ABC and Uni. of Michigan, have in fact risen a little after what can be characterised as a sharp fall.
We expect a small fall in consumer confidence in July since consumer confidence has already fallen considerably, i.e. the majority of the bad news has already been discounted.
There will also be focus on consumers' assessment of the labour-market situation through their assessment of 'how difficult it is to get a new job' and 'plenty of new jobs'. These assessments are expected to show that consumers have grown even more pessimistic due to the rise in unemployment.
Japan: industrial production - June
Industrial production grows at a slower pace. In May it grew by 1.2% y/y and the year on year rise for the past three months is 0.8%. We expect the slower global and Japanese activity to be increasingly reflected in the forwardlooking economic indicators such as PMI which shows that new orders are on the decline and stocks are accumulated.
Thursday
USA: GDP - Q2
GDP is also one of the important economic indictors this week. GDP is the total production of goods and services in the US and the best indicator of the development in the economy. GDP is often used as a measurement of whether the economy is in recession. In Q1, GDP rose by 1% after a rise of 0.6% in Q4. Although there are prospects of stronger growth in Q2, it is not a sign that the risk of recession has disappeared.
Growth was driven up by consumer spending and notably the tax cuts. They lifted consumer spending by 0.5% in the first two months of Q2 compared with Q1. In terms of retail sales, consumer spending was weak in June, but services which are not included in retail sales are expected to pull up consumer spending. We therefore expect consumer spending to grow by somewhat more than the 1.1% in Q1.
Net exports (exports minus imports) contributed strongly to growth over the past four quarters and the prospects are also good for Q2. Exports have significantly outperformed imports in the two first months of the quarter, and this may cause growth to rise by up to 1 percentage point.
The indicators of corporate investment point to a rise as the sale of investment goods increased in the first two months. On the other hand, businesses have cut jobs, which is often seen together with a fall in investment.
Housing investment which has driven down growth by an average of 1 percentage point since Q2 2006 will also drive down growth in the second quarter. The drag on GDP growth by housing investment is expected to fall during the rest of the year, which is reflected in a more moderate fall in residential construction.
The largest element of uncertainty is inventory investment. The businesses have not increased the production although the demand from consumers has been boosted by the tax cuts. This indicates that businesses have met a large part of the demand by drawing on inventories. A fall in inventories pulls down GDP growth, and this factor increases the uncertainty about growth considerably.
All in all, we expect growth to be slightly above 2% in Q2. On the other hand, there are prospects that growth will fall in Q3.
The GDP data comprise the Fed's preferred inflation indicator, the personal consumption expenditure deflator ex. food and energy. It rose by 2.3% in the first quarter.
USA: labour costs - Q2
The employment cost index is the Fed's preferred indicator of the inflationary pressure from the labour market. It will be a significant signal if the rate of increase of labour costs falls. When labour costs are so significant it is because they account for two thirds of companies' total costs and thus extensively determine the development in companies' total costs. Wages account for 70% of labour costs while the rest pays for social security, pension, sickness, leave, etc.
The increase in labour costs in the private sector slowed a little from Q4 to Q1. This was mainly due to a fall in other staff costs whereas the proportion of wages actually rose. Since the wage rises in, e.g., the labour market report have slowed solidly, we expect labour costs to rise at a more modest pace. In Q1 they rose at 0.7% (Q4: 0.8%).
The euro zone: consumer prices - July
Consumer prices are high and much too high for the liking of the ECB. Moreover, the high rate of inflation is deadly to growth in consumer spending since it erodes households' purchasing power. In June, inflation rose to 4.0 % y/y. We expect inflation for July to be a tad higher or at the same level.
The UK: house prices - July
According to Nationwide, house prices have been falling for the past eight months. The fall in June was 0.9% m/m. That reduced the rate of increase to -6.3% y/y, the biggest fall since 1992.
We expect the housing market to be soft for some months yet, with house prices falling further. The ratio between house sales and the stock of unsold houses in the RICS survey - which is a good indicator of future house prices - is still falling, and the number of mortgage loans has fallen to an all-time low since the start of the series in 1993. The number of deals is very low, and this indicates that the tight credit conditions are inducing many potential house buyers to stay out of the market.
Friday
The US: employment - July
Employment is usually the most important indicator for the financial markets. The employment data give a good indication of the state of the economy, although there has been some discrepancy between the picture painted by the employment data and GDP lately.
As evident from this week's highlight, the economy is in recession judging by the labour market, although the recession looks fairly moderate. Employment has fallen by 73,000 a month over the past six months, and a look at private employment in particular shows that private employment has done worse than that, recording a fall of 93,000 a month.
We expect the employment situation to deteriorate over coming months. This is corroborated by the fact that most indicators signal a sharper fall in employment. We expect a fall in employment of about 80,000 in June, but we still await a number of indicators which are not released until next week.
Jobless claims fell by 16,000 between the two collection weeks (when employment data are collected). The level points to a small fall in employment. ISM's index of employment in the manufacturing industry fell sharply, to 43.7, and this signals that the number of workers laid off in the manufacturing industry is rising (by about -100,000 a month). ISM's index of employment in the service sector also fell sharply in June, to 43.8. That indicates a massive fall in employment in the service sector, but indicators are somewhat volatile, so you should not overinterpret this signal. The weighted employment index of the ISMs points to a fall of 125,000 in employment. The indices of vacancy ads in newspapers and on the internet have fallen further. In the construction sector, employment has fallen, but construction has fallen more sharply still. In our view, there is a surplus of 300,000 skilled workers in the residential construction sector.
Overall, we expect a total fall in employment of 90,000. You should also remember the reviews of employment made for the two preceding months. The latest revisions have all been downward, as was the case during the recession in 2001.
Because of the interest in inflation, there is also focus on developments in wages. Wages rose by 0.3% from May to June and by 3.4% y/y. The general rise in unemployment is expected to lead to a lower rate of wage increase and hence to weakening inflationary pressure from the labour market.
The US: ISM Manufacturing - July
ISM is the nationwide sentiment indicator for the manufacturing industry and gives a reasonable indication of the development in industrial production and GDP. What the financial markets will be looking at this time is whether the ISM falls like the European sentiment indicators. In June, ISM rose from 49.6 to 50.2, which indicates unchanged activity in the manufacturing industry.
We expect a fall in ISM in July due to the following:
- Our ISM indicator signals that ISM may fall by a few points, to 47, in July.
- The turmoil in the financial markets may pull ISM down.
- The sentiment index of small businesses has fallen considerably more than has ISM. They are notably bearish about sales.
- New orders in the manufacturing industry have risen robustly since February. However, the rise is to some extent due to price rises.
The fall in oil prices may calm down the corporate sector.
In addition to the index, focus will be on new orders, employment and the price index. The price index in particular, which rose in June to 92, the highest level since 1980, will attract a good deal of attention. Given the fall in oil prices, the price index may fall.
The US: car sales - July
Factory car sales are interesting, because the number has fallen drastically. Sales in June were as low as 13.6m, the lowest they have been since August 1993). Q2 sales 2007 were 16m. There are no prospects of improvement for the short term, and we expect another fall in July.
The fall in car sales was due to the high petrol prices (above USD 4 a gallon) which have already prompted Americans to reduce their driving. Another factor that pulls down car sales is the fact that consumers under pressure from, e.g., lower employment, higher unemployment, slowing wage rises and lower house prices, will postpone buying durable consumer goods including cars.
According to a manager at Ford, there are prospects of a further fall in sales n July. Notably the American car producers are hit hard by the rising petrol prices and the tighter credit standards.
The UK: PMI Manufacturing - July
The sentiment indicator of the manufacturing industry fell sharply in June and has been below 50 for the past two months, which indicates a setback in the sector. The PMI index is now the lowest it has been since the beginning of 2002. The sub-indices of production, new orders and employment have all fallen significantly, whereas the price indices are rising and are now the highest they have been since the series started. This means that there are prospects of a setback for the manufacturing industry at the same time as mounting inflationary pressure. We expect PMI to remain week over the coming months.
Sweden: GDP - Q2
The Swedish economy is slowing down. GDP rose in Q1 2008 by 0.4% q/q, the lowest rate of growth since mid-2003. In addition to slower growth in consumer spending, also inventories pulled down growth, and there was a fall in public investments. We expect the growth rate to remain moderate in Q2 (at around 0.3%-0.5% q/q) due to the global economic slowdown and the fall in domestic demand.
Households are under pressure because the rising inflation rate erodes the purchasing power, and the weaker data for retail sales and consumer confidence in May and June indicate a slowdown in private consumption. In conjunction with lower expectations of exports, this means that there are prospects of companies toning down their investment plans from the existing robust level. This is also reflected in the business confidence indicators, and the rate of increase of new orders - for the domestic market as well as the export market - has fallen significantly. On the other hand, we expect public investments to swing back into positive territory after the fall in Q1.
Jyske Markets - FX Research
http://www.jyskebank.dk/finansnyt
The analysis is based on information which Jyske Bank finds reliable, but Jyske Bank does not assume any responsibility for the correctness of the material nor for transactions made on the basis of the information or the estimates of the analysis. The estimates and recommendation of the analysis may be changed without notice.
The Japanese economy is in a mixed state with inflation finally starting to show up in key price indices. Tokyo would not be unhappy with a weakening JPY. 
The BOE cut rates at its April meeting as expected. Future rate reductions are now on hold due to inflationary pressures. Odds are the BOE policy is now on hold until yearend. The GBP had been under relative pressure due to worries about a sharply deteriorating economy. 
The Swiss National Bank tries to maintain a stable relationship of the CHF vs. the EUR. It is never pleased with weakness of the CHF against the EUR and could raise rates in response to an ECB policy tightening. 
The Australian economy is clearly starting to slow. A key focus for the Reserve Bank of Australia remains above target inflation, plus strong employment and commodity demand. This has kept the AUD underpinned. The Reserve Bank of Australia is still trying to rein in price pressures. 
Trading in the CAD had been volatile as the Bank of Canada was making aggressive rate cuts to keep pace with the Fed and to get ahead of a possible economic slowdown. No more rate reductions are in the pipeline. 
