On track for December 2016

Economic outlook - 07/09/2016

The disappointing August employment and manufacturing ISM reports in the US point to a postponed Fed funds rate hike to December 2016. 

Disappointing job-creation numbers in the USA make a Fed funds rate hike this month unlikely, and we still expect the hike to come in December. In August, 151,000 nonfarm jobs were created, which was below the consensus estimate of 180,000. Private-sector job growth slipped to 126,000 from 225,000 in July.

The August employment report was much weaker than the June and July reports, in line with the slowing job-creation trend so far this year. On average, 182,000 new nonfarm jobs have been created per month this year, compared to 229,000 in 2015. The same trend holds true in the private sector, where the average number of new jobs fell from 221,000 per month in 2015 to 160,000 so far this year. The unemployment rate is unchanged at 4.9%.

The August figures are particularly important in the light of recent comments by Fed officials, who indicated that the timing of the next Feds funds rate hike would hinge in part on this employment report. Upcoming statements by the Fed will provide more clarity, but the poor showing by the ISM manufacturing index – which dipped from 52.6 in July to 49.4 in August – supports our scenario, under which the Fed softens its tone and waits until December to raise rates.

While the chances of a Fed funds rate hike in December rather than September have increased, expectations of additional hikes further out have not changed significantly. 2-year and 10-year Treasury yields are nearly unchanged at 0.78% and 1.60%, respectively.

The emerging-market economic calendar was quite full this past week, with the publication of GDP figures for Brazil and India followed by leading economic indicators. Broadly speaking, and in line with our expectations, economic activity in the emerging-market bloc has been relatively stable, with most growth coming from weaker economies such as Russia and Brazil (see table below).

Annual Real GDP Growth  

Growth in India fell short of our expectations owing to more moderate consumer spending (+6.8% vs. +8.3%) yet should remain on a firm uptrend over the next few quarters as leading indicators there pick up speed. The monsoon season is expected to end well, and this should buoy consumer spending in rural regions. At the same time, rising public-sector wages and progress in reform efforts – including the application of a unified VAT system – represent real growth drivers.

In Brazil, the removal of Dilma Rousseff marks the end of the political soap opera that has gripped the country for the past few quarters. Investors can now turn their attention back to the many economic challenges faced by the administration of Michel Temer, the country’s new leader. The critical issue will be to reduce the country’s fiscal imbalances against a backdrop of slowing growth and high inflation. The rebound in commodity prices and the political breakthrough provided a boost that will not last forever, while structural reforms aimed at raising the country’s productivity have yet to be adopted.

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