Today will see non-farm payroll numbers and other employment and unemployment statistics from the United States. So the debate on how quickly the US economy is slowing will receive some more evidence this time centering on those unfortunate enough to be put out of work by it. Yesterday was not a good omen as weekly jobless claims rose to 479,000 and the previous weeks figures were revised up by 3000 to 460,000. So the evidence of a slowdown continues to mount. Equity markets continue to ignore such evidence in the main and indeed have rallied substantially as the evidence has mounted. By contrast the US government bond market continues to signal a much grimmer future. Yields progressing through the maturities are at 0.56% for two-years,2.92% for ten-years, and 4.05% for the thirty-year maturity.These are signalling much more than a gentle slowdown in my view and exceed the evidence received so far.
If we look at the impact of this on the ordinary person we can in fact find it in mortgage rates. The US thirty-year mortgage rate has fallen to yet another new low at 4.49%.
Commodity Prices including Wheat continue to rise
The Commodity Research Bureau spot index that I introduced on Wednesday rose again yesterday by 1.11 to 444.78 so commodity prices overall continue to rise. Looking at the components of it the two main contributors to this were again foodstuffs and metal prices. Again wheat prices are rising. I added a late update to yesterday’s article which explains why this happened.
Russia has announced it will impose an export ban on grain and grain products from August 15th to December 31st as a response to the effect of the country’s worst drought in half a century on its expected wheat crop. A more preferable move would have been for world bodies to have got together and used some of the approximately 200 million tons of grain stocks which exist to stop panic moves like this but sadly this seems unlikely, although of course it does beg the question of what the purpose of such stocks is/are.
The effect of this is that wheat futures prices are continuing to rise and are now around US $8.35 per bushel which means that they have risen by some 25% this week. In a feature common in frenzied markets one can now find forecasts of prices rising to US $9 per bushel in one article and US $10 in another so take your pick! Of course the most useful forecast would have been an accurate one last week! One feature of these times that keeps occurring to me is to wonder why the stockpiles that exist are not used to calm the situation down. This theme seems familiar to the way the euro zone and its politicians dithered and delayed when countries such as Greece hit problems. Perhaps it is something to do with the bureaucratic and political mindset. Anyway whilst the holders of the stockpiles dither the world faces the potential prospect of some food price based inflation.
UK Producer Price figures
In a coincidence of timing this morning has seen the publication of producer price figures for the UK by the Office for National Statistics. These have been high for some time indicating inflation in the UK price chain and I have written on the dangers they signal on quite a few occasions. Whilst the rising CRB spot index will mostly influence trends after the figures today were compiled it does signal a danger for the next set. Particularly if we do get a burst of food price driven inflation.
The figures themselves again make worrying reading. Output price or what is sometimes called ‘factory gate’ annual inflation for all manufactured products rose 5.0 % in July. Input price annual inflation rose 10.8 % in July compared to a rise of 10.7 % in June. If one looks at a breakdown for the output price figures then a monthly rise in food prices outweighed a drop in petrol costs. The input price figures are more complicated as some expected them to be even worse but on a month on month basis they fell by 1% due to falls in the price of crude oil, home produced food products and imported metals which were only partially offset by a rise in fuel prices. So these influences stopped us having annualised input price inflation of over 11%.
There is an apparent consensus in the UK that we have had a burst of inflation and the problems are ending. Such a conclusion is not immediately apparent from these figures. Indeed if you look at the input price figures from March 2010 until now you get on an annualised basis 10.5%, 12.9%, 11.7%, 10.7%, and now 10.8%. If we now move to output price index figures for the same time period we get 5%, 5.9%,5.5%,5.1% and 5%. As you can see actually examining the figures suggests that we are seeing continued inflationary pressures in the UK price chain. This is before any impact from the current uptick in commodity prices as much of this has taken place since these figures were calculated.
Accordingly it looks as though UK inflation will continue on a higher trend than the Monetary Policy Committee expected for some time yet. Again the thought occurs to me that they should be forced to define the meaning of the phrase “temporary blip” which they have used to describe inflationary pressures in the UK as they are looking more and more permanent.Should the US economy continue to slowdown then the UK’s relative economic position will not be improved by the way that our supposed inflation guard dog has been asleep particularly over the past 6 to 9 months. If a worldwide economic slowdown should take place and we continue our relatively poor inflation performance then a period of what is called stagflation is quite possible.
Industrial and Manufacturing Production
The Office for National Statistic released figures for these too this morning. We saw a surprise fall in industrial output which fell by 0.5% in June on a month on month basis and the fall was explained by an earlier start to maintenance work on oil and gas rigs in the North Sea. Perhaps the BP oil spill influenced this. Manufacturing output rose by 0.3% on the same basis. So overall not an inspiring set of figures although it is true to say that previous months had been better. The figures do pose one or two questions for the economic growth figures that were released for the second quarter which at 1.1% were very strong. Whilst the ONS has already denied these figures will lead to a revision I remain of the view that June is in fact in the second quarter of the year.
For those looking for annualised figures then industrial production was up 1.3% on a year earlier and manufacturing output rose by 4.1% on the same basis.
Core European Government bond markets
I have written in the past various updates on US government bond behaviour and also that of the peripheral euro zone countries. However I have addressed what is happening in the what are considered to be the “core” euro zone countries less often. Well yesterday saw an intriguing trend whereby not only did German government bonds rally but they took other European countries with them. For example German ten-year government bond yields are now 2.56% but French equivalents are now 2.83% (-0.07% on the day) and the Netherlands fell to 2.74%. Perhaps most surprising of all in some ways as our inflation performance as discussed above is somewhat divergent from the core countries of the euro zone the UK ten-year government bond yield fell to 3.24% a fall of 0.04% on the day.
There are several implications of this. Firstly the deflation/disinflation argument appears to be influencing the core euro zone government bond markets and treating them as a group. Secondly that economic divergence does not seem to be factored into the movement as the French economy for example is not performing as well as the German and the UK is on a different inflation flight plan. Thirdly that the peripheral euro zone countries were not included in such a move so whilst their government bond yields have in general improved recently on a relative basis they are now deteriorating. As has been common this year Greek government bonds performed the worst with their ten-year yield rising to 10.38% inspite of a favourable review of its economic performance from the IMF.
US jobless figures disappoint and reinforce economic slowdown thoughts
Todays employment statistics from the Bureau of Labor Statistics will have added to fears of a US economic slowdown. Non-farm payrolls fell by 131,000 which to those unfamiliar with the US system means that this is the number of jobs lost by the US economy in July. To add to the gloom the fall in employment for June was revised up to 221,000 from the previously reported 125,000. Expectations were for job losses as the temporary periods of work for US census workers ended but private sector employment growth was disappointing too at 71,000.
The unemployment rate held steady at 9.5% which repesents some 14.6 million individuals. This seems confusing at first because employment had fallen but what has also happened is that the labour force has shrunk too. The BLS estimate of those not in the labour force has risen from 79.61 million in July 2009 to 82.62 million now.
This will make the Federal Reserve meeting which starts on August 10th even more interesting and provides more food for thought to those who wonder for how long past numbers will be revised unfavourably in economic statistics as it is becoming a consistent theme which if it persists will not aid credibility……..