The FTSE 100 is up, the pound is up, to quote JK Rowling, but slightly out of context – all is well. Except, the reality and the perception are quite different.
When JK Rowling was near the end of her Harry Potter series, she said that the last word of the last book would be ‘scar’. In fact, she changed her mind, the last word was ‘well’, preceded by ‘all is’. But that is fiction, and as they say, truth is much stranger. The latest data out of the UK and US is being hailed as a triumph for the UK, but how you interpret it depends entirely on what you were thinking before the data was released. All is well, but only if you choose to interpret things that way.
Lets’ take the latest news first.
The US jobs report was out late on Friday and it was a touch disappointing. US non-farm payrolls – which is the closest we get for a figure on US employment, rose by 151,000 in August – that was the third lowest rise this year. So far in 2016, US non-farm payrolls are up 1.45 million, an average of 181,000 a month. So August was below average. Drilling down into the data, US hourly earnings rose by just 0.1% in the month, compared to the month before.
It seems that there are three takes you can have on this, depending on your previous view of the world.
Take one: The US jobs data is disappointing, and factor in that the latest purchasing managers index tracking US manufacturing from ISM pointed to contraction in the sector, then that surely does not bode so well for the US economy and the odds of an interest rate hike have lengthened.
Capital Economics reckons that US rates are most likely to be going up in December, but then that depends on what happens with the data between now and then.
The big problem with the US labour market lies with the difference between unemployment and the number of US workers who are involuntarily working part-time and indeed US workers who have given up looking for work, and thus don’t show up on the data as unemployed – distorting the unemployment rate. What we can say is that average weekly hours worked in the US fell to a two and half year low in August.
Take two: Bill Gross, from Janus Capital, but often described as the world’s foremost expert on the bond market, told Bloomberg that the data means that a September rate hike is on – not 100%, but likely. But then Bill Gross has been warning that QE and ultra-low rates have been distorting the economy for some time. So if the Fed was to increase rates it would sit in nicely with his narrative of the economy – and thus he interprets the data with respect to that narrative.
Take three: US woe is good for sterling. The markets are now betting on US rates staying firm this month. And one consequence of this is that sterling has moved up – very close to 1.33 dollars to the pound, versus just less than 1.19 recently, but 1.48 before the EU referendum.
The markets were also buoyed by the recent purchasing managers index tracking UK manufacturing relative to the equivalent data for the US and Eurozone. The UK index surged, leaping ahead of the US and Eurozone index, with only Germany seeing a higher score and even then only just.
This helped lift sterling against the euro too, – 1.19 euros to the pound, versus a recent low of near 1.15, and a pre-referendum level of around 1.28.
But Samuel Tombs, from Pantheon Economics, who was very much in the Remain camp, interpreted the improving data in terms of one-offs, putting it down to a rise in inventories, and a statistical error relating to how the data for August is seasonally adjusted.
Capital Economics, whose boss was one of the few economists in the Leave Camp, was altogether more encouraging, saying that “the fall in the pound already appears to have provided a boost to manufacturing exporters. Indeed, the surge in the manufacturing PMI in August was partly driven by a rise in new export orders to its highest level since June 2014.”
But this idea that the EU referendum has been good for the UK because it has led to a fall in the pound may have been overdone. If it is such a good thing, then why is it that the same people who celebrated Brexit and the resulting fall in the pound are now celebrating the fact that sterling has risen.
Truth is, it is too way soon to tell. On Monday we will get the purchasing managers index tracking UK services – since manufacturing only accounts for 10% of the UK economy, this index tracking services is far more important and last month the index crashed.
Actually, it will be a long time before we know the consequences of Brexit and much depends on what trade deals can be done – especially related to services – and foreign direct investment. But at least Monday’s index will give us an idea – so watch out for what it says.