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LGT Navigator: Strong US labor market data calls interest rate easing into question

July 8, 2019

A much stronger than expected employment growth in the USA seems to call into question the Fed's anticipated rate cut in July. The capital markets then corrected their expectations accordingly, leading to strong price movements.

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On Wall Street, the latest US labor market statistics on Friday, after a holiday-related break the day before, brought the week to a hectic close. Surprisingly strong job growth with 224,000 new jobs created in June – the strongest growth since January – significantly exceeded market expectations of 160,000 and thus dampened investors' interest rate fantasies. While the stock market initially came under pressure, the main indices in New York closed with only a moderate daily minus. The US dollar rose against the euro from 1,1290 to 1,1210 and the yield on ten-year US government bonds climbed from 1.95% to 2.07% at times. In Europe, the Euro Stoxx 50 left the trading week on Friday with a minus of almost -0.5% as a result of the US economic data. Less attention was paid to the fact that 11,000 fewer jobs were actually created in the two previous months of April and May. The unemployment rate rose slightly from a very low level to 3.7%. At the same time, wages increased, albeit somewhat less than expected. It will be interesting to see how US Federal Reserve Chairman Jerome Powell will comment on the current state of the US economy before the parliamentary finance committee on Wednesday. The Fed will then discuss a possible interest rate hike on 31 July.

Poker for top positions

Should IMF chief Christine Lagarde be confirmed as the new president of the European Central Bank (ECB), the head of the Bundesbank Jens Weidmann, who until recently was also traded as the favourite for Draghi's successor, could in return take over the leading position at the International Monetary Fund. The German central banker is supported by the fact that the IMF is traditionally chaired by a European, while the World Bank is chaired by an American. However, this award principle is repeatedly criticised, especially by the emerging economies. In addition to Weidmann, the French central bank chairman Francois Villeroy and the Finnish central bank president Olli Rehn, as well as the ECB chairman Mario Draghi, are also regarded as top candidates for the IMF head position.

Deutsche Bank on the verge of comprehensive transformation

Germany's largest bank announced the reduction of up to 18,000 jobs worldwide and a radical restructuring. Approximately one fifth of the workforce, most recently around 91,500 employees. According to CEO Christian Sewing, this is a real new start and the most comprehensive transformation in decades. The restructuring of the group will cost EUR 7.4bn by 2022, which means that the Bank will again slide into the red in 2019 – the fourth loss year in five years. A loss of EUR 2.8bn is now expected in Q1. The bank intends to finance the restructuring from its own resources and refrain from a further capital increase. The Bank is therefore setting itself the target of a hard core capital ratio of at least 12.5% in future. So far, a capital ratio of more than 13% has been targeted. Shareholders will have to forgo a dividend. As part of the restructuring, Garth Ritchie will step down from his positions as Vice Chairman and Head of Corporate and Investment Bank (CIB) until July 31. The restructuring plan also includes the establishment of a "bad bank" to handle poorly performing financial products. In addition, the bank intends to invest around EUR 13bn in digitization by 2022.



Economic Indicators July 8

MEZ Country Indicator Last
08:00 GE Exports (m/m) -3.4%
08:00 GE Imports (m/m) -0.9%
08:00 GE Industrial Production (m/m) -1.9%
08:30 FR Business Sentiment Index 99.2
10:30 EZ Sentix Investor Sentiment -3.3

Earnings Calendar July 15

Country Corporate Period
US Citigroup Q2

 

 

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Editor: Alessandro Fezzi, +41 44 250 78 59, E-Mail: lgt.navigator@lgt.com
Source: LGT Bank (Switzerland) Ltd.

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Herausgeber: LGT Bank (Schweiz) AG, Glärnischstrasse 36, CH-8027 Zürich
Redaktion: Alessandro Fezzi, +41 44 250 78 59, E-Mail: lgt.navigator@lgt.com
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