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A still solid US jobs report highlights divergence between immediate labor demand and building forces of restraint on US economy

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USD: US nonfarm payrolls rise by 372k jobs in June, stronger than consensus but with downward revisions to the prior 2 months of -74k. Average hourly earnings (AHE) are up a weaker than consensus +0.31%MoM but with revisions higher that put Y/Y AHE growth at 5.1% and the unemployment rate is steady at 3.6% for a fourth straight month. Meanwhile, the household survey shows a decline in employment of 315k and the participation rate also falls to 62.2%. The report overall, focuses attention on the divergence between immediate labor demand and the building forces of restraint on the US economy. While headcount gains more than expected in June, the length of the workweek declines which leaves aggregate hours up 0.3% for the month, a rather ordinary gain for an expansion.  The 0.31% gain in average hourly earnings also highlights very ordinary gains in wages this year despite high inflation in the first half.  
 
USD: However, there’s nothing in the June jobs report that is likely to dissuade the Fed from tightening 75bp at the July meeting, in line with market expectations. Consequently, the data continues the push towards more tightening of financial conditions which will become more relevant for the performance of US labor markets in 2023 than 2022, given the slowing in US consumer spending to a roughly 1.5% pace in the first half 2022 – and with a very severe tightening in financial conditions still to fully impact demand. US employment data have on average has provided zero months of lead time in predicting recessions since World War II.  An actual recession would begin when production and employment peak in the US economy.  As long as the Fed acts to reduce backward looking inflation with forward-looking monetary policy tightening, the risk of recession likely remains acute.  In the interim, monthly job gains should start to slow, both as labor supply remains constrained and demand eventually starts to soften in sectors like construction or real estate that are tied to softer housing.
 

Canada - strong wage growth likely to keep BoC on track to hike 75bp this week 

CAD: Canadian headline employment declines by -43.2k in June, well below consensus for a +22.5k increase and Citi’s +45k. Meanwhile, the unemployment rate falls from 5.1% to 4.9%, the lowest level since the early 1970s but due to the participation rate declining sharply to 64.9% from 65.3%. However, hourly wages of permanent employees jump to 5.6%YoY, significantly higher from the 4.5% in May. Citi analysts expect that the weakness in headline employment is unlikely to have much implication on monetary policy in the near term after generally strong jobs growth over the past year. Instead, the BoC is more likely to be concerned over signs of stronger wage growth. Therefore, the generally strong job growth over the last year in combination with very low 4.9% unemployment rate and strong 5.6%YoY wage growth will likely keep BoC on the hawkish trajectory and Citi analysts continue to expect a 75bp hike from the BoC at the July meeting this week (refer Week Ahead).
 

Week Ahead  - Back to inflation watch in US; How much will UK GDP contract? RBNZ to hike 50bp, BoC by 75bp this week

USD: US June CPI MoM – Citi: 1.2%, median: 1.1%, prior: 1.0%; CPI YoY – Citi: 8.9%, median: 8.8%, prior: 8.6%; CPI ex Food, Energy MoM – Citi: 0.6%, median: 0.6%, prior: 0.6%; CPI ex Food, Energy YoY – Citi: 5.7%, median: 5.7%, prior: 6.0% - following another upside surprise to core CPI in May, Citi analysts expect a similar 0.6%MoM increase in the June data (although just barely at 0.56% unrounded). Very strong shelter prices in May data are likely to persist for at least a few months, and the team expects a strong 0.61% increase in primary rents and a 0.57% increase in owners’ equivalent rent in June. The clearest downside risks for CPI in June and over the rest of the year comes from goods prices, particularly auto prices which are a substantial weight in CPI inflation. Generally, goods prices should continue to slow in the coming months as demand for goods eases.
 
USD: US June PPI Final Demand MoM – Citi: 0.6%, median: 0.8%, prior: 0.8%; PPI Final Demand YoY – Citi: 10.5%, median: 10.4%, prior: 10.8%; PPI ex Food, Energy MoM – Citi: 0.4%, median: 0.5%, prior: 0.5%; PPI ex Food, Energy YoY – Citi: 8.0%, median: 8.3%, prior: 8.3%; PPI ex Food, Energy, Trade Services MoM – Citi: 0.3%, median: 0.5%, prior: 0.5%; PPI ex Food, Energy, Trade Services YoY – Citi: 6.5%, median: NA, prior: 6.8% - monthly increases in overall producer prices have slowed somewhat in recent months from early-year strength, but Citi analysts still expect a solid 0.6% increase in PPI final demand in June. This would partly reflect another strong increase in energy and (a more moderate) increase in food prices. The team also expects a 0.3% increase in core PPI that excludes food, energy, and trade services prices, a more moderate rise than prior months.
 
USD: US July (preliminary) University of Michigan Sentiment – Citi: 49.1, median: 50.0, prior: 50.0; 1Yr inflation expectations – Citi: 5.3%, median: 5.2%, prior: 5.3% - the preliminary University of Michigan consumer survey for July will likely be very closely watched after a jump in 5-10Yr inflation expectations in preliminary June data caused another hawkish shift from the Fed. Citi analysts expect the sentiment index to fall even further to 49.1 in July as recession concerns become more widespread. Most focus however, will be on inflation expectations where the team expects the 1Yr  inflation expectations to remain at 5.3%. And the longer the short-term measures remain high, the higher the risk that the 5-10Yr measure rises even further.
 
GBP: How large will the UK contraction in Q2 prove? – Citi analysts expect UK growth to prove marginally more resilient than consensus in May with consumer spending – especially services – likely peaking during the month. Overall, Citi analysts expect growth of 0.3% MM to mean a -0.5% QQ contraction in Q2 overall, below BoE forecasts of -0.3% and 0.1% in June and May respectively. Worse is likely yet to come in H2’2022. UK monthly GDP, May: Citi Forecast 0.3%MM, Consensus 0.0% MM, Prior -0.3% MM; GDP, 3M/3M: Citi Forecast 0.0% 3M/3M; Consensus 0.0% 3M/3M, Prior 0.2% 3M/3M; BoE Forecast for Q2: 0.2%.
 
GBP: BoE Governor Bailey will appear at the Official Monetary and Financial Institutions Forum. Introducing the FSR last week, Bailey referred to a material deterioration in the economic outlook. But in his comments last week, BoE chief economist Pill made repeated reference to the potential for an outsized rates move (50bp) in August. A corroboration from Bailey could be an important signal into the August meeting.
 
EUR: German ZEW Expectations, July: Citi Forecast -41.0, Consensus -40.0, Prior -28.0; ZEW Current Assessment, July: Citi Forecast -33.0, Consensus -34.5, Prior -27.6; Euro Area: ZEW Expectations, July: Citi Forecast -40.0, Prior -28.0.
 
NZD: July RBNZ Monetary Policy Meeting Preview: Citi OCR forecast; +50bps to 2.5%, Previous; +50bps to 2.0% - Citi analysts expect the RBNZ MPC to deliver another 50bp increase in the OCR to take it to 2.50%, a level broadly associated with a neutral level of monetary policy. But taking policy to neutral is unlikely to satisfy the MPC…it is likely to be only a step towards a policy level that is restrictive. Domestic hard activity data since the last OCR decision on May 25 shows a solid core of domestic demand while house prices declines have been small, with prices arguably still higher than what the RBNZ would prefer. In addition, the NZ labor market remains consistent with the RBNZ’s assessment that it is stronger than what would be consistent with full employment. Citi analysts do not however, expect the MPC to respond with a 75bp increase in the OCR as the RBNZ remains ahead of other central banks in terms of the policy cycle.
 
AUD: Australian June Labor Force Survey: Citi employment change forecast; 22k, previous; 60.6k; Citi unemployment rate forecast; 3.8%, previous; 3.9%; Citi participation rate forecast; 66.7%, previous; 66.7% - the June labor force survey is expected to show a very tight labor market, which follows the stellar May jobs. An unemployment rate below 4% is consistent with full-employment and Citi analysts also expect another month of solid job-gains because forward looking indicators of labor demand still remain extremely favorable with risk to the report titled to the upside. For the RBA, the June LFS will likely be another confirmation of a tight jobs market that will lead to an increase in wages growth. The team expects the RBA to hike again in August and September by 50bps each, with risk to the upcoming Q2 inflation print—on July 27—firmly tilted to the upside.
 
CAD: Bank of Canada Rate Decision: Citi: 2.25%, median: 2.00%, prior: 1.50% - a number of factors since the BoC’s last policy decision in June have coalesced to make a 75bp rate hike in July the most likely scenario, taking policy rates to 2.25% this week. At the June meeting, the policy statement explicitly put the option of larger-than-50bp hikes back on the table with a commitment to “act more forcefully if needed” to control inflation. Since then, May inflation data has been again much stronger than expected. Beyond this week, Citi analysts expect 50bp hikes from both the BoC and the Fed at their September meetings and for policy rates in Canada to reach 3.5% by year-end. Inflation forecasts in the BoC’s quarterly Monetary Policy Reports have been consistently revised up over the last year and are likely to be substantially higher again in July, closer to around 7-8% for the next few quarters and likely near 7% for the year. Growth forecasts will likely be revised lower, but with medium-term forecasts consistent with a “soft-landing” scenario. Still, given recent market focus on recession risks, this is likely to be a key topic of questions at Governor Macklem’s press conference.
 
CNY: China Trade Balance (USD bn) June: Citi Forecast 70.0, Consensus 76.80, Prior 78.76; Exports (%YoY): Citi Forecast 12.0, Consensus 12.5, Prior 16.9; Imports (%YoY): Citi Forecast 6.0, Consensus 4.0, Prior 4.1 – China’s export growth may slow mildly in June – Citi analysts see quite mixed signs for the trade momentum in June. Altogether, the team expects export growth to slow from 16.9%YoY previously to 12.0%YoY and import growth to improve from 4.1%YoY to 6%YoY, leaving the trade surplus still at a sizable US$70bn.
 
CNY: China GDP (%YoY) 2Q: Citi Forecast 0.2, Consensus 1.2, Prior 4.8 – Citi analysts keep their Q2 growth at 0.2%YoY but see risks tilting to the upside — hard data in April-May and high-frequency trackers suggest China’s economic recovery post the Omicron wave is largely on track. While sluggish consumption and property development may drag down GDP growth, robust infrastructure investment and the current account surplus should partly offset the downward pressures.

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