Global Daily – Labour markets to deteriorate further

by: Aline Schuiling , Bill Diviney

Euro Macro: Eurozone job security declines – The details of the European Commission’s consumer sentiment survey showed that expectations about the labour market have deteriorated noticeably since the middle of this year. Consumers’ assessment about unemployment during the next twelve months (balance of percentage reporting increase and percentage reporting fall) has risen by more than ten percentage points between May and October (to 15.9 from 5.7). This suggests that the decline in overall consumer sentiment (to -7.6 from -6.5) during that period was largely driven by the deteriorating outlook for the labour market and the resulting decline in job security. When looking at past changes in the consumers’ assessment of the outlook for unemployment and the actual unemployment rate, it turns out that changes in sentiment about the labour market are a good leading indicator for changes in the unemployment rate, with a lead of six months to one year. As we have written before, other indicators such as a drop in temporary employment also point in the direction of a sharp deterioration in labour market prospects and rising unemployment over the next year. (Aline Schuiling)

US Macro: Trough in growth is still to come – Fed rate cut expectations declined further last Friday, with pricing for a January cut falling from around 50% to just 30% following the better-than-expected nonfarm payrolls print. Alongside the upside surprise in the headline print (a gain of 128k vs expectations of 85k, despite the GM strike-related distortions), there were net positive revisions to the past two months of +95k – pointing to a rather stronger labour market than would be expected considering how subdued business confidence is. However, as if to remind markets of the persistent weakness in the manufacturing sector, today’s September factory orders (excluding lumpy aircraft items) showed a contraction of -0.1% mom, with August revised down to -0.2% from an earlier flat reading. The forward-looking indicators for employment also remain weak, with the ISM manufacturing employment index still in contraction territory at 47.7 in October, with services not much better at 50.4 as of September (sharply down from the average of 56.0 in H1 2019). Indeed, we expect payrolls growth to continue softening in the coming months. With private consumption growing at well-above trend rates in Q2 (+4.6%) and Q3 (2.9%), we therefore expect payback in the fourth quarter, with overall GDP growth potentially dipping below 1.0% annualised. Such a weak outturn would come as a reality check to markets that have grown accustomed to a resilient US economy, and could even raise fears of a recession once again. (Bill Diviney)