Weekly Macro Comment Don't Let Us Payrolls Shake Your Confidence

6 July 2009

Weekly Macro Comment Han de Jong, Chief Economist

Don’t let US payrolls shake your confidence •

US payroll numbers disappoint

•

Leading indicators continue to support optimism

•

Policymakers should stop talking about exit strategies

Financial markets have not been impressed by recent macro

On the first issue, I think it is more likely to surprise on the

data. Many equity indices have fallen in three consecutive

upside than on the downside, but that is, of course, a function

weeks while government bond yields have also fallen.

of expectations. Early cyclical indicators have improved

Meanwhile, a lot of attention is being paid to exit strategies for

impressively for some time now. Last week, for example, the

monetary

eased

US ISM for the manufacturing sector rose from 42.8 in May to

aggressively in the wake of the worst recession since the Great

and

44.8 in June. That level is roughly associated with stagnant

Depression. In my view, market participants are becoming too

GDP. The decline in overall output thus may have ended

negative about the near-term outlook. At the same time, I

towards the end of the second quarter. That is a considerable

believe

that

fiscal

policies

have

exit

improvement compared with the decline of almost 6% annualised in the previous two quarters. This improvement is

improvement is not clear, and deflation risks still outweigh the

likely to spread through the global economy. The labour market

inflation risks by a very wide margin.

data was poor, but it is a lagging indicator and can also be

in

public.

What

should

stop

lies

behind

been

near-term

strategies

policymakers

that

discussing the

volatile. In any event, the loss of jobs in June was much less Equity markets responded very badly to the US June

than earlier in the year.

employment report. Non-farm payrolls fell by 467,000, more than the expected drop of 365,000 and also more than May’s

Another positive sign was the Case-Shiller home price index.

decline of 322,000. Presumably, the equity market had got

In April, the price index was down by 18.12% yoy. That does

ahead of itself a little and was disappointed when the data was

not sound great, but it was better than the drop of 18.72% in

not what optimists believed it should be. Some are questioning

the previous month. And it was the second month in more than

the so-called green shoots in the economy. Bear in mind that

three years that the yoy number was better than in the

at turning points, the data tends to become more volatile.

previous month. Unfortunately, the improvement is purely a

Given the turn in the inventory cycle, the improved working of

second-derivative phenomenon, as the mom change remained

the credit mechanism and the stimulus measures that are yet

negative. On this measure, home prices are down by 32.6%

to take effect fully, an improvement in cyclical conditions is a

from their peak three years ago. This is an indication not only

near certainty. There are really only two important questions:

of the size of the wealth losses but also of how long a

how strong will this improvement be and will it last?

correction in housing markets takes.

US: Industrial production and ISM

US: S&P / Case Shiller home price index

% yoy

index

10

65

20

60

15 10

5

55

0

50

-5

45 40

-10

35 30

-15 1998

2000

2002

2004

2006

Industrial production (lhs) Source: Bloomberg

HAN DE JONG +31 (0)20 628 4201

2008 ISM (rhs)

% yoy

5 0 -5 -10 -15 -20 -25 2003

2004

2005

2006

2007

2008

2009

Source: Bloomberg

ECONOMICS DEPARTMENT

6 July 2009 The improvement reflected in the US ISM can also be seen

of monetary easing early next year. This is far too early in my

elsewhere. In Japan, the Tankan survey for the second quarter

opinion. Eurozone M3 growth fell to 3.7% yoy in May and credit

showed an improvement, as did the Nomura PMI. Industrial

growth continues to come crashing down. On a month-to-

production rose by 5.9% mom in May in Japan, the same as in

month basis, M3 and the total amount of credit outstanding

April, while small-business confidence increased from 34.1 in

have been more or less unchanged for some months. In the

May to 38.0 in June.

US, the rise in yields along the government yield curve has led to a sharp drop in mortgage applications. If sustained, this

In Europe, too, confidence continued to improve. The

would deal a new blow to the housing market.

European Commission’s index of economic confidence, which combines consumers and producers and is seen as the most

Presumably, policymakers are talking about exit strategies

comprehensive and reliable of these indices, rose from 70.2 in

because their policy actions have given rise to inflation fears. I

May to 73.3 in June, the third consecutive increase and the

have said this before and will say it again: inflation fears are

highest reading since November.

absurd! Deflation risks are significantly larger than the risk of inflation. The output gap is growing and is already much larger

Eurozone Economic Sentiment

than at any time we can remember. And the monetary statistics show that money growth (at least measured by the wider

index

money aggregates) and credit growth are weakening, not

120

strengthening. In such a situation you do not get inflation.

110

Period.

100 90 80 70 60 98

99

00

01

02

03

04

05

06

07

08

09

Source: Bloomberg

I must concede that there was also some less positive news last week. Apart from the US labour market report, US vehicle sales disappointed in June and construction spending was down by 0.9% mom in May. In the eurozone, retail sales disappointed in May, falling by 0.4% mom and 3.3% yoy. In Japan, the unemployment rate rose to 5.2% in May and construction orders were weak in May. Nevertheless, it seems most likely to me that the forces that have led to an improvement will gradually become stronger and therefore I believe that some sort of a recovery will emerge in the course of the second half of the year. The question that is much more difficult to answer is whether this recovery will be sustainable. In my opinion, that partly depends on the policymakers. And here I have my doubts. Policymakers have started to talk about exit strategies. And the markets are listening. Futures markets are pricing in a reversal Important information The views and opinions expressed above may be subject to change at any given time. Individuals are advised to seek professional guidance prior to making any investments. This material is provided to you for information purposes only and should not be construed as an advice nor as an invitation or offer to buy or sell securities or other financial instruments. Before investing in any product of ABN AMRO Bank N.V., you should obtain information on various financial and other risks and any possible restrictions that you and your investments activities may encounter under applicable laws and regulations. If, after reading the brochure, you consider investing in this product, you are advised to discuss such an investment with your relationship manager or personal advisor and check whether this product –considering the risks involved- is appropriate within your investment activities. The value of your investments may fluctuate. Past performance is no guarantee for future returns. ABN AMRO Bank N.V. has taken all reasonable care to ensure that the information contained in this document is correct but does not accept liability for any misprints. ABN AMRO Bank N.V. reserves the right to make amendments to this material.

HAN DE JONG +31 (0)20 628 4201

ECONOMICS DEPARTMENT