The flow of disappointing US economic data continued with the Payroll report of Friday that reported a gain of 54 000 in May, well below the monthly average gain in 2011 of 182 000, and an increase in the unemployment rate from 9% to 9.1%. The unemployment rate was not all bad news as, according to the US Survey of households, an extra 272 000 workers joined the labour force only partly offset by a 105 000 increase in household employment.
More people entered the labour force, presumably because they thought they could realistically find work, but not all did so. Hourly earnings in the US are rising very slowly, by 0.1% in April and 0.3% in May. With little growth in wages, any perceived inflationary threat from the labour market has dissipated, providing further reason for postponing higher interest rates and hence the weaker US dollar.
Not all the recent news about the US economy was bad, The ISM non-manufacturing index that covers 90% of the US economy rose from 52.8 to 54.6, marginally ahead of consensus. Numbers above 50 indicate growth. More encouraging was that the employment component of this Index rose from 51.9 to 54, consistent with payroll growth of 175 000, and faster than that indicated by the official payroll report.
The weaker numbers and their implications for low interest rates for longer weakened the dollar and strengthened the euro and emerging market currencies, including the rand. This made the week a better one for US dollar investors on the JSE and emerging markets generally than it was for investors in the S&P 500, that after an extended period of outperformance lost ground to emerging markets last week.
The rand during the week had turned out to be a particularly strong emerging market currency. The rand made gains not only against the US dollar, the euro and the Aussie dollar but also gained about 3% against our basket of other emerging market currencies.
It would appear that the rand had gained from the approval of the Competition Tribunal of the Wal-Mart / Massmart deal after having weakened relative to the Aussie dollar and other emerging markets in the weeks leading up to the decision. SA specific risks, that is policies more or less friendly to foreign investment, would appear to have a modest influence on the exchange value of the rand in recent weeks. The more important influence on the rand will remain those emanating from global markets in the form of commodity prices and flows into emerging market bonds and equities.
The news from the commodity markets was not unsatisfactory as prices held up, helped by the weaker US dollar. The oil price in US dollars was largely unchanged.
The stronger rand and the more uncertain outlook for the US and global economy weakens further the case for higher interest rates in SA. This has been partly recognised in the bond market with a downward shift of the term structure of interest rates. The probability of an increase in the repo rate this year receded the week before last but remained largely unaffected by the news last week.
The US equity markets are undemandingly valued relative to earnings and interest rates and have become less so this past week. The weaker data disturbs the outlook for future earnings as the performance of the S&P 500 this past week made perfectly clear. The key to the outlook for the US economy and the equity markets will be the willingness of US business to put their strong balance sheets to work hiring workers and buying equipment.
The confidence of US business would be greatly assisted by the belief that Washington will deal effectively with the US Budget and US government debt. Any sense that China is loosening rather than tightening its monetary stance will be very helpful too.
To view the graphs and tables referred to in the article, see Daily Ideas in the Daily View: Daily View – June 6: Global markets and the rand: Not all bad news