Further disappointment was seen in Germany this morning as factory orders slumped, coming in at down 2.2% on the month against expectations of just negative 0.2%. Although historically this is a volatile series it goes someway to confirm that the current downturn is more than a temporary event. Council member Olli Rehn summed up; that growth has ‘slowed significantly’. The report showed domestic orders were up 0.7% but a huge drop in exports and investment goods orders offset, most notably with orders from China and the continued lack of demand for autos. Earlier in the week we had factory activity which had contracted for the sixth consecutive month. The euro weakened and the ten-year Bund hovered at the ECB deposit rate level of negative 0.4%, expectations are growing for a further 20bp cut to the ECB’s deposit rate as early as this month and a restarting of the central banks debt purchases.
Now for today’s ‘Main Event’, US Non-Farm Payrolls (NFP), eagerly awaited for clues as to the Fed's actions at their next meeting at July month-end. The last NFP for May had disappointed with just 75k new jobs way below expectations but this was revised to just 72k as June was released at a stronger 224k and the two month revision was minus 11k, so the two month average runs around 150k, still reasonably strong for this period in the current extended expansion. Average hourly earnings saw another positive for the bond market at +0.2% dropping the year over year figure to 3.1% from 3.2%. The participation rate and the unemployment rate both ticked up a touch at 0.1%, leading to 62.9% and 3.7%, respectively.
So a stronger headline which should dispel the calls for a 50bp ease at the end of July meeting but 25bp is still likely given the Fed does not meet in August. After July the next meeting is September 18th so we have two more NFPs by then. Of course, trade frictions and the President’s involvement could have a massive impact in the meantime.
Guess we are back to data dependance on US rates although the bond market is still betting on much lower rates to come this year; while inflation is not a concern longer-dated bonds ‘remain the land of opportunity’.