- Is US economy losing momentum?
Last week, the U.S. economy had a full agenda with many decisive data releases and policy developments.
According to official figures announced on Friday, non-farm employment rose by 157 thousand in July, marking the smallest gain in the last five months, below the market expectation of 193 thousand.
The slowdown in the pace of payroll gains reflected the lower hiring rates in the government, construction and professional services sectors.
Meanwhile, non-farm employment figures for May and June were revised up from 244 thousand to 268 thousand and from 213 thousand to 248 thousand, respectively.
The unemployment rate in the country fell from 4.0 percent to 3.9 percent in July. The average hourly earnings increased by 0.3 percent monthly and by 2.7 percent annually.
Markets did not overreact to the lower than expected increase in employment as it was offset by positive revisions the previous month.
However, the outlook for the U.S. economy does not look as good as it did a few months ago when employment figures were evaluated more positively along with other manufacturing, service, and construction sector data.
The following are some of the data released last week that caused to question the extent of the momentum in the economy:
- The Institute for Supply Management’s (ISM) monthly index for manufacturing decreased to 58.1 in July, 2.1 percentage points lower compared to the previous month.
- The Markit’s manufacturing industry Purchasing Managers' Index (PMI) fell to 55.3 from 55.4 in July.
- The non-manufacturing ISM index fell to 55.7 in July from 59.1, recording the lowest level in the past 11 months.
- The service sector PMI Index decreased by 0.5 points in July to 56.
- Construction spending declined by 1.1 percent in June, registering the biggest drop in over a year.
- $200 billion of Chinese products will be taxed at 25%
The escalation in U.S. - China trade tensions, which is considered a contributing factor in the loss of momentum in the country's economy, also made headlines last week.
On Thursday, President Donald Trump proposed an increase in the tariff rate from 10 percent to 25 percent on $200 billion worth of Chinese goods, in a bid to pressure Beijing into making trade concessions.
“This week, the President has directed that I consider increasing the proposed level of the additional duty from 10 percent to 25 percent. The 25 percent duty would be applied to the proposed list of products previously announced on July 10,” the U.S. Trade Representative Robert Lighthizer said in a statement.
In response, a few hours later the Chinese Ministry of Commerce announced additional duties between 5 to 25 percent on $60 billion worth of American goods.
The response from Beijing shows the Trump administration's high-pressure strategy is not bearing much fruit.
- Fed keeps interest rate unchanged
Another important event last week was the meeting of the Federal Open Market Committee (FOMC).
Following the two-day meeting, the FOMC kept the key interest rate stable at 1.75-2.00 percent while signaling that further gradual hikes are on the way.
“The Committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective over the medium term,” the FOMC statement said.
Analysts interpreted this sentence as a signal that the Fed could make a move towards further normalization in the September meeting, despite greater risks of trade tensions.
- New US sanctions on Iran come into effect
The new week will start with the U.S. moving forward with sanctions on Iran, scheduled to begin on Monday.
“The United States is going to enforce these sanctions,” Secretary of State Mike Pompeo told reporters returning with him from a summit in Southeast Asia on Sunday.
This means the U.S. government will re-impose the following sanctions that were lifted pursuant to the Joint Comprehensive Plan of Action, more commonly known as the Iran Nuclear Deal:
- Sanctions on the purchase or acquisition of U.S. dollar banknotes by the Government of Iran.
- Sanctions on Iran’s trade in gold or precious metals.
- Sanctions on the direct or indirect sale, supply, or transfer to or from Iran of graphite, raw, or semi-finished metals such as aluminum and steel, coal, and software for integrating industrial processes.
- Sanctions on significant transactions related to the purchase or sale of Iranian rials, or the maintenance of significant funds or accounts outside the territory of Iran denominated in the Iranian rial.
- Sanctions on the purchase, subscription to, or facilitation of the issuance of Iranian sovereign debt; and
- Sanctions on Iran’s automotive sector.
In addition, following the 90-day wind-down period that ends on August 6, 2018, the U.S. government will revoke the following JCPOA-related authorizations under U.S. primary sanctions regarding Iran:
- The importation into the United States of Iranian-origin carpets and foodstuffs and certain related financial transactions.
- Activities that are undertaken pursuant to specific licenses issued in connection with the Statement of Licensing Policy for Activities Related to the Export or Re-export to Iran of Commercial Passenger Aircraft and Related Parts and Services.
-Markets to focus on inflation data
Markets will follow inflation data to be announced on Friday. Other releases in the data calendar include JOLTS Job Openings, consumer credit, producer price index, and weekly unemployment claims.
The messages of Fed officials will undoubtedly be on the radar of investors as well. Chicago Fed President Charles Evans and Richmond Fed President Tom Barkin have planned speeches on Wednesday and Thursday, respectively.