UNITED STATES
June NFP surprised on the upside confirming that the economy is at full employment, despite a tick up in the unemployment rate, most likely due to summer entrants into the labor force. Wage growth was weak again. And the minutes of June’s FMOC meeting confirmed bitter suspicions. The committee is divided about low inflation, its causes and implications for future policy. While “most” members expect inflation to increase to target by 2018/2019, there seems to be near unanimity in working with a flat Phillips curve, and trouble about the transmission of wages to prices. So, the trajectory of rate hikes is again into question. The economy seems to be doing well, vide the job market. This should support the start of balance sheet adjustment, aka tapering—I maintain my expectation for September. But a rate hike in December would now depend on inflation, and wages. Average hourly earnings rose by only 0.15%momsa in June, while growth in May was revised down by 0.1pp to 0.1%. The year-over-year rate stands at 2.5%, below consensus expectations. We should get more talk about this in Janet Yellen’s semiannual statements to Congress on Tuesday and Wednesday; and there is the June CPI data on Friday. Congress will grill her on regulation, with Democrats applauding her strong defense of the Dodd-Frank provisions, rightly so, in my opinion. Watch also for the China data due next week.
In addition to Yellen, Williams speaks on Monday; Brainard and Kashkari speak on Tuesday; George, on Wednesday; Evans, on Thursday; Kaplan, on Friday.
- Tuesday, July 11: JOLTS job openings, May (last, 6,044k). Yellen prizes the JOLTS report, and for good reasons. Although somewhat de-phased, it contains key information on job creation, quits and hires. A telling sign of a tight labor market is one were the quit-rate exceeds the hire-rate, with workers confident they can find better jobs by increasing the efficiency of searching, unencumbered by a competing job. Also, a job market where hires are below openings as employers compete to find the right kind of human capital to match their need. This is the current job market, and new data for May should confirm this situation.
- Friday, July 14: CPI, June (consensus, 0.1%momsa, 1.7%yoy; core, 0.2%momsa, 1.8%yoy). The market expects an acceleration in core inflation following three consecutive readings below 0.10%. However, the actual result could be somewhat soft, given deflation in used car prices and airfares, as well as additional disinflation from cell phone plan discounts. A number close to zero would ring alarm bells, with changes in expectations about monetary policy, as we noted above.Retail sales, June (consensus, 0.1%momsa; ex-auto & gas, 0.2%momsa; control group, 0.3%momsa). Same-store sales were higher in June, and there was another sharp monthly drop in gas prices that should boost non-gas sales. There was, however, a modest decline in auto sales.Industrial Production, June (consensus, 0.3%momsa; capacity utilization, 76.6%). Solid growth in auto and mining production will help overall IP growth, keeping CU relatively high, and helping expectations about Mexican growth and the MXN/USD rate.University of Michigan sentiment, July (consensus 95.1). Unchanged mom at relatively high levels but down two points from its recent peak in May. Higher frequency consumer surveys show some pullback in sentiment, reflecting the uneven performance of the stock market over the last two weeks. As we have noted, measures of sentiment continue to race ahead of actual numbers. In the week, measures of Q2 GDP are down to 2.0%qoq-saar with current activity indicators at 3.2%, driven by better than expected details in the ISM business surveys and employment report.
BRAZIL
I was wrong, and what seemed to be improbable is now, apparently, within reach—a decision by the Lower House to send President Temer to stand trial before the Supreme Court. The first act of the drama plays out Monday, at the Judiciary Committee, with the reading of the rapporteur’s opinion. The second act follows on Thursday, when the Committee votes on his opinion. And the final act, for the Lower House, could take place on July 17-19, with a full House vote on the Committee’s recommendation. If the pro-trial proposal survives the rapporteur’s report, and the committee’s decision, it would still need 342 out 510 votes for approval. President Temer and his supporters have three chances.
It seems that the first one they have lost, already—and herein the first surprise. The rapporteur is from the same party as the President (PMDB) and from the same state as his supposedly loyal ally, the Head of the Lower House, Rodrigo Maia. In fact, he was chosen by Maia. Sérgio Zveiter, however, said last week that he may well argue in his report for condemning Temer. Moreover, Maia himself seems to be courting the Presidency, replacing a legally incapacitated Temer. For this, he is counting on the support of the second largest party in the current ruling coalition, the PSDB. Although at first supporters of Temer, leaders of the PSDB said last week that the country “could not withstand the lack of governability,” and would abandon his coalition. The catch is that these leaders are new; the ones who came to replace the legally wounded “president on leave,” Aécio Neves, implicated in the same accusations from JBS that hit Temer. The powerful São Paulo wing of the party has not yet decided. It so happens that, within the PSDB, the two most prominent contenders for the party’s nomination in 2018 are from São Paulo—Geraldo Alckmin and João Dória. They fear that Rodrigo Maia would also run in 2018. That, as a sitting, albeit pro-tempore, President, he would command an overwhelming advantage over the “re-baptized” coalition.
The second surprise from last week is that the momentum within the PSDB, suddenly, is slipping away from São Paulo—for the first time in the party’s 30yrs-odd history. If Thursday’s vote in the Judiciary Committee confirms this, Temer’s chances diminish, indeed. So, the market will keep close attention to these development —and the market will react positively to negative news about Temer.
The story behind the turnaround about Temer is a growing consensus among business leaders that the economy is too weak to withstand an ineffectual president. In conversations with Maia they confirmed his disposition to maintain and strengthen the current economic team; to support the social security reform; to support budget cutbacks to meet the targets for the fiscal deficit in 2017 and 2018.
The issue will be Maia’s ability to deliver on these promises, navigating the political instability of ousting a second President in less than two years, and of becoming the third president to attempt to form a majority in a Congress elected under Dilma and the PT’s leadership. All of this while maintaining his electability in 2018, without which he would quickly loose governability, and his own political future. For in contrast to Temer, whose most recent ambition was to be, not the candidate, but the primus-inter-pares in selecting the candidate for 2018, if Maia becomes a weak candidate for 2018, he would immediately lose control of Congress. Unless, in addition to the surprises of a negative rapporteur’s report; a negative recommendation from the Judiciary Committee; and of the 342 votes in the Lower House; Maia assumes the Presidency with another surprise, endorsing someone else as the candidate for 2018.
On the economic side, after last week’s blockbuster news (deflation with a sharp downswing in the DI-curve and expectations that the SELIC may reach as low as 8-8.25% by yearend) this week will be lighter, with mainly rear-view type indicators.
- Wednesday, July 12: Retail sales, May (consensus – “narrow” 0.4%momsa, 3.3%yoy; “broad” 0.5%momsa, 6.3%yoy). After a couple of years of dramatic drops, retail sales found a low-level plateau with small marginal gains. The large yoy numbers reflect low bases. The “broad” concept includes consumer durables, one of the items that lead the deflation in June’s CPI.
- Thursday, July 13: Services output-National Accounts, May (consensus 0.4/0.5%momsa; 6/7%yoy). This datum is a broader measure of services output, which accounts for about 2/3 of total output. Because the drop in real incomes lagged that of activity, services output (and prices) were at first slow to react to the recession. Now, instead, they drive it and signal the very slow recovery ahead.
- Friday, July 14: Central Bank quasi GDP indicator (IPC-Br), May (consensus 0.5%momsa; 3%yoy). A plateau of 0.4-0.5%momsa translates to annualized growth at about 0.6%pa, which was what forecasts for economic growth were for GDP in 2017, before the last political crisis. Forecasts are now at 0.3% or lower. I believe it could well be naught or even negative. So, look for lower numbers for this indicator starting in June or July at the latest. Prior to the crisis there was an idea that investment would, finally, show a positive number in 2017. Last week, the Confederation of Industry (CNI) revised their forecast, to -2.7%yoy.
IMPORTANT NOTICES:
This report is a general discussion of certain economic and geopolitical trends and forecasts. It does not constitute investment advice of any kind or constitute a recommendation to buy or sell any security or other financial instrument. Investors may not rely upon any of the conclusions or other statements contained herein.
Certain of the factual information contained herein was obtained from third party sources which the author considers reliable, but the accuracy of such information cannot be guaranteed.
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