As Hurricane Florence charges toward the U.S., investors in so-called disaster
bonds are likely to be paying close attention. The securities are issued by
insurers to transfer risks of catastrophic events — like hurricanes — to
investors. A benchmark index widely used to gauge the market’s performance
lost 16 percent in a week during hurricane season last year. But the gauge,
which is updated at the end of each week, hasn’t reacted yet to the storm and
was at a record high as of Friday. -Jeremy Hill, Bloomberg New York
U.S. Dollar Trading Range
US 10Yr Yield Trading Range
S&P 500 Trading Range
Russell 2000 Trading Range
NASDAQ Composite Trading Range
The BofAML China Financial Condition Indicator (FCI) eased to 101.4 in August from 102.0 in July. It was driven by a depreciation of CNY NEER in yoy terms (0.8% in August vs appreciation of 1.2% in July) and lower nominal interest rate (average of 7d repo and 10yr treasury yield), which was down to 3.07% in August from 3.13% in July, though TSF (total social financing) growth declined.
Loan growth stayed stable while TSF/M2 growth fell.
China All-system Financing Aggregate
In August, new TSF increased to RMB1,520bn from RMB1,042bn in July, stronger than market expectation but roughly in line with our forecast. The yoy growth of outstanding TSF fell to 10.1% in August from 10.3% in July. Note that the PBoC revised its TSF definition in July, by including banks’ asset-backed securities and loan write-offs. Without this definition change, TSF growth would fall to 9.5% from 9.7%.
New bank loans came in below expectation by easing to RMB1,280bn in August from RMB1,450bn in July. The yoy growth of outstanding bank loans remained at 13.2%. Meanwhile, M2 growth came in lower than expected by falling to 8.2% from 8.5%.
The underlying bank loan data suggest that, despite PBoC’s push for better loan supply for the real economy, banks remained cautious to increase their risk appetite during the economic downturn while constrained by capital requirement. New discounted bills increased to RMB410bn in August from RMB239bn in July, and new household loans rose to RMB701bn from RMB634bn. But loans to corporates declined for both short- term working capital loans and long-term loans (for investment).
For TSF, the monthly contraction in some of the off-balance-sheet credit (such as trust loans and non-discounted bankers’ acceptance) became less severe in August, while bond issuance accelerated. Regarding M2 growth, it eased again in August after a notable rise in July. It could be partly driven by higher fiscal deposits (vs. the monthly decline 12 months ago).
Unemployment rate higher than expected
The August unemployment rate in seasonally adjusted terms edged up to 4.2% from 3.8% in July, above the market expectation of 3.8% (Chart 1).
The August youth unemployment rate in seasonally adjusted terms also increased to 10.7% from 9.6% in July. The seasonally adjusted employment rate eased to 60.4% from 60.5% in July, while the participation rate gained slightly to 63.1% from 62.9% in July. The number of yoy job gains further decelerated to 3k from 5k in July and 142k in 1H18 (Chart 2).
Challenges continue across segments
Challenges remain on the labor front in August, if not intensified. First, as we noted in our viewpoint, moderating growth momentum compared to last year’s relative boom continues as an overarching theme in weighing down on the labor market. Notably, jobs in segments that we note to be more vulnerable to the economic cycle continue to press on the overall employment (Chart 3)
Secondly, across the sectors, we see broad-based moderation in the number of payrolls. Jobs in the facilities management and business support services continued to decline from July. It posted -117k due to a contraction in the management demand and a shift towards regular employees from temporary employees. Jobs in the retail, wholesale, accommodation, and restaurant services sector declined by 201k in August. We believe cost burden pressure on rapid wage hike is growing and the pace of inbound tourist recovery is falling below our expectation (Chart 4).
Thirdly, we continue to see moderation in temporary employees, daily workers, and unpaid workers (Chart 5).
Specifically, the moderation in number of temporary employees was significant as the number of total temporary employment went down by 187k in August from -108k in July. Furthermore, number of unpaid workers also dropped 36k yoy.
Lastly, sector-specific stories continue to roll out – the manufacturing sector is reconstructing and a slowdown in the shipbuilding and shipping sectors weighed down on manufacturing employment over the year. Structural issues on shrinking workforce such as the declining operations ratio in the long term is still lingering.
Dramatic recovery unlikely near-term
In light of sluggish yoy job gain recovery in the last two months, we now expect the Bank of Korea (BoK) to adjust its job gains forecast for 2H18 from 210k downward at the October assessment of economy. We however continue to believe the possibility of one rate hike in 4Q is still alive as the governor stated that labor market conditions are not a priority factor for monetary decision at the July meeting. Moreover, while labor conditions are deteriorating, its ripple negative effect onto private consumption has yet to emerge.
Going forward, we remain concerned about the current unfavorable labor environment and its anticipated persistence throughout the year. We expect growth momentum to moderate in 2H18 and a further moderation in manufacturing and real-estate related jobs from the base effect. We think a service sector recovery is also unlikely near-term on the back of wholesale and retail jobs related to manufacturing sector and absence of foreseeable sentiment-booster events near-term (Chart 6).
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