By Dr. Chenjiazi Zhong, CFA, CAIA, FRM
The U.S. nonfarm employers added 156,0001 jobs in September, less than the 170,000 expected by economists. Payroll growth in July and August was revised 7,000 lower. During the third quarter, job growth averaged 192,000 per month - up from 146,000 in the second quarter, and roughly matching the monthly average of 196,000 in the first three months of the year. Payrolls' average growth was 229,000 per month last year. The most gains occurred in professional and business services and in healthcare. The unemployment rate in September was 5%, edging up from 4.9% in August.2
The US manufacturing sector rebounded from contraction in September, according to the Institute of Supply Management. The ISM Purchasing Managers Index (PMI)3 for manufacturing sector was 51.5 percent, an increase of 2.1 percentage points from a contractionary reading of 49.4 percent in August. All sub-indexes contributed to the overall growth, except new export order and supplier deliveries, which declined 0.5 percent and 0.6 percent respectively.
U.S. consumer prices index increased 0.2%, more than expected, in August as rising rents and healthcare costs offset a drop in gasoline prices, pointing to a steady build-up of inflation that could allow the Federal Reserve to raise interest rates this year.4 The core CPI, which strips out food and energy costs, rose 0.3 percent in August - the biggest increase since February - after gaining 0.1 percent in July.
The consumer spending was little changed in August as income growth cooled, pointing to a softening in consumption after a run of strong gains.5 That was the weakest reading since March and reflected a slowdown in worker pay. Wages climbed 0.1 percent in August after 0.5 percent gains in the previous two months.
Second-quarter economic growth (GDP) as revised to 1.4 percent at an annual rate in the third estimate, up 0.3 percentage point from the second estimate. Business investment in the second quarter was actually a lot better than previously reported. Investment excluding housing actually rose 1% instead of dropping 0.9%.6 A 57% plunge in spending by energy companies coping with cheap oil was the main culprit in the weak business investment. However, if mining and drilling are excluded, investment rose a healthy 10% in the second quarter.
The Markit's eurozone manufacturing PMI accelerated in September to 52.6 points, up from 51.7 points in August. The French index was at a seven-month high despite failing to recover the 50.0 level. However, the final Markit's eurozone composite Purchasing Managers' Index showed that eurozone business activity in September expanded at its weakest rate since the beginning of 2015.7 Also, a mild acceleration in France was offset by declines in Germany, Italy, Spain and Ireland. The final Markit's eurozone composite PMI posted 52.6 in September, down from 52.9 in August and matching the earlier flash estimate.8 There is growing caution seen about the economic outlook and political uncertainty as Britain gears up to start exit proceedings from the European Union and Germany and France face elections.
The Markit's PMI for the service sector, which accounts for 80% of annual economic output in Britain, plunged from 52.9 in August to 52.6; however, it beats the market expectation.9 The CIPS/Markit PMI for the manufacturing sector continues on the expansionary territory and jumped to 55.4 in September from 53.4.10
The depreciation in the pound has provided a fillip to U.K. exports, but is also set to boost inflation and put a squeeze on consumers. Meanwhile, "hard Brexit", with the U.K. losing access to the EU single market and customs union,11 became the top concern for investors. IMF recently downgraded the growth expectations for the UK economy next year, blaming the effects of the Brexit vote.
The Bank of Japan would deepen negative interest rates to thwart any sharp spikes in the yen, which the central bank sees as an obstacle to stoking inflation and economic growth. On September 21, 2016, the BOJ dropped its previous target of increasing base money at an annual pace of 80 trillion yen ($792 billion), a move that indicates its huge bond-buying program was reaching its limits. While the BOJ would be mindful of the impact that the ultra-easy policy could have on banks' profits, that would not prevent it from expanding stimulus, if needed, to revive Japan's economy.
On 1st October, 2016, the Chinese yuan will officially become part of the IMF's special drawing rights (SDR) basket, joining the USD, EUR, JPY and GBP. Symbolically, the inclusion of RMB will raise its profile and can be seen as the IMF's endorsement of China's rise as an economy and efforts in opening and reforming of its financial system. Pragmatically, the SDR will a key catalyst to deepen financial market reforms in China and further the internationalization of RMB as the usage and adoption of the currency rise. Over time, central banks and other asset managers would need to adjust their portfolio allocation to include more RMB-denominated assets. However, the shift in asset allocations would take time given the dearth of quality RMB assets and relatively restricted access to onshore financial markets.
On Real Assets
The S&P GSCI Total Return gained 4.1% in September, cutting the loss in the 3rd quarter to 4.2% and bringing its year-to-date performance to 5.3%. 19 of 24 commodities were positive in September from just 8 in July, the most to turn from negative to positive in two months since July 2012. Energy gained 6.1%, making it the best-performing sector, and livestock performed the worst of the sectors, losing 12.1%. The winning single commodity in September was unleaded gasoline, gaining 11.4%, and lean hogs lost 22.1%, the most of any commodity.12
Gold futures settled lower on Friday, September 30. Prices for the yellow metal still ended the month higher, but Friday weakness erased gold's gain for the quarter. In the wake of last month's September Fed policy meeting, attention in the gold market has turned away from the interest rate watch to broader financial market performance.
Deutsche Bank Crisis
The trigger for the crisis has been a $14 billion U.S. Department of Justice fine on that bank for fraudulent mortgage lending behavior during the U.S. housing market bubble. However, the fine was little more than the straw that broke the camel's back. Deutsche Bank's (NYSE:DB) balance sheet never really recovered from the 2008-2009 global economic recession, while years of reckless lending decisions and low global interest rates further depleted the bank's shaky capital base. Fearing Deutsche Bank would have to raise capital-selling stock and diluting per-share value, or even find itself in need of a state bailout, investors sent its shares tumbling to a record low in more than 20 years on September 26.
Deutsche is Germany's biggest lender by far. It has assets valued at 1.8 trillion euros ($2 trillion) on its books. That's equivalent to more than half the size of the German economy. Like many other banks in Europe, Deutsche Bank needs "to convince investors that its business model is viable going forward, that it has addressed the issues of operational risk arising from litigation," said Peter Dattels, deputy director of the IMF's Monetary and Capital Markets Department.13 Meanwhile, the German government denied it was working on a rescue of Deutsche Bank.
FOMC Meeting in September
The FOMC did not raise rates, keeping it at 0.5%, but strongly signaled it could still tighten monetary policy by the end of this year as the labor market improved further. Three members of the FOMC voted to raise the rate. But other members were concerned that the core inflation rate was too far below its target rate of 2.0%. The central bank will remain accommodative on economic policy.
The number of the total nonfarm employments in September is slightly below the estimates; however, it does not necessarily mean the labor market is doing badly. The report showed that the labor force participation rate is expanding and the average hourly wage is steadily increasing over time.
The employment report will be the last before the Fed's next policy meeting on November 1-2. The markets see almost no chance of a rate increase at that meeting given how close it is to the election.
 Source: U.S. Bureau of Labor Statistics
 Source: U.S. Bureau of Labor Statistics
 Source: Institute for Supply Management
 Source: Wall Street Journal
 Source: Bloomberg
 Source: The White House (blog)
 Source: Reuters
 Source: HIS Markit
 Source: Wall Street Journal
 Source: Chartered Institute of Procurement Supply
 Source: Financial Times
 Source: Bloomberg
 Source: International Monetary Fund