US worker pay rises, but at the slowest pace on record.

* US worker pay rises at the slowest pace on record…
* Dollar bulls retreat as rate hike expectations slip.
* Chinese PMI shows their economy is still slowing…
* Gold slips further after the worst month in 2 years…

And Now. Today’s A Pfennig For Your Thoughts.

I returned from my trip up to Vancouver/Whistler over the weekend and right back into triple digit temperatures. The ‘heat is on’ here in St. Louis as we turn the calendar over to August; where did the summer go? Frank was hiking all weekend and dropped me a note late last night to let me know he just didn’t have a Pfennig introduction in him today, so I’ll kick things off without the standard words from the big boss.

It should be a very busy week for the markets here in the US as we have an absolute plethora of data releases. Today we will start the week off with US Personal Consumption and Income along with the PCE Price index and the US Manufacturing PMI. And then later this morning we will have the Dallas Fed PCE along with US Domestic Car and Truck sales for July. Tuesday is a little lighter on the data, with only the Durable Goods and Factory orders for June. Wednesday will bring a ‘preview’ of Friday’s job report with the release of the US ADP employment numbers along with the Markit Services PMI and US ISM numbers. Thursday brings the usual weekly jobless claim numbers which are projected to remain below 275k. And we end the week with the much anticipated Non-Farm Payroll data for July. After Friday’s surprisingly weak wage data market makers will be closely watching the numbers on Friday to try and gauge the health of the labor market.

Data released in the US on Friday morning showed wage gains which had been gaining momentum ground to a halt during the 2nd quarter. The 0.2 percent rise in wages and salaries reported by the Labor Department Friday morning was the smallest increase since records began in 1982. Wages had increased .7% during the first quarter, and most economists predicted the data would show the pace steadily increasing as the US economy begins to pick up some steam, but they were wrong. Janet Yellen has repeatedly pointed to wages as the key to timing the ‘liftoff’ in rates, so Friday’s data caused many to again question if the FOMC would be willing to pull the trigger during their September meeting.

The latest data from Bloomberg shows there is currently a 38% probability that the Fed will raise rates in September, down from a 48% probability prior to the release of Friday’s data. The poor wage data sent the dollar lower, with the dollar index giving up all of the gains it had made during the week. Lately the dollar is trading off of rate expectations, as dollar bulls continue to bet on a US rate hike this year while dollar bears believe the data will force the Fed to hold rates near zero until sometime next year. The dollar’s selloff on Friday was slowed by words from our own St. Louis Fed President James Bullard who was quoted in a Wall Street Journal report as saying the latest US growth data boosts the case for a hike in September. His comments which hit the markets mid-day helped the dollar pare losses late into Friday’s trading.

The euro was still able to inch up a bit on Friday, climbing above $1.10 before retreating back below in late trading. Data out of Europe this morning showed growth picking up some steam in the Netherlands, Spain and Italy with the latter growing at the fastest pace in over four years. Markits final Eurozone Manufacturing PMI came in at 52.4, comfortably above the 50 level which separates growth from contraction. British manufacturing growth also picked up some steam in July with the Market PMI rising to 51.9 vs. a reading of 51.4 in June which was the lowest reading in over two years. Bets that the BOE would be coming to the table with a rate increase has helped the pound sterling recover from its recent lows reached back in mid-April.

This morning saw some selling in the euro after the Greek stock market plunged following a five-week shutdown.

The official gauge of Chinese manufacturing fell to a five-month low as reported over the weekend sending the Chinese stock market back into a tailspin. China’s official manufacturing PMI fell to 50 for July, down slightly from the 50.2 reading in June. The data will be followed up with another private reading of manufacturing in China due out today, but the markets are already starting to speak of a ‘hard landing’ for China. We have heard this rhetoric before, that the Chinese officials will be unable to keep the world’s second largest economy from slipping off a cliff. But the naysayers have been wrong so far, and while the Chinese economy has certainly slowed it has not seen the kind of precipitous drop which many have predicted. Chinese GDP as reported by the IMF is predicted to be 6.8% in 2015 and to slow even more in 2016 to 6.3%. And while this is definitely a slowdown from the 9.8% average growth rate since the Chinese markets were opened up in 1978 it still is pretty impressive for an economy the size of China’s.

Worries concerning Chinese growth weighed on the price of gold which actually eked out a small gain on Friday following the poor payroll numbers published in the US. Gold slid 6.5% in July, its worst monthly performance in over 2 years as investors were convinced by Janet Yellen and her associates at the FOMC that interest rates would be heading higher in 2015. And this morning the shiny metal is again losing ground as the dollar recovers a bit from Friday’s beating.

Commodities suffered across the board, with oil slipping on news out of Iran that output would be increased by 500,000 barrels a day within a week after international sanctions are eased. The Iranian Oil Minister Bijan Namdar Zanganeh said output could be increased by as much as 1 million barrels a day within a month of sanctions being lifted; which according to Iran’s news agency could happen as soon as November. The fall in oil prices has increased pressure on both the Canadian dollar, Mexican pesos and Norwegian krone all of which are sensitive to crude prices.

To recap, US data released Friday showed worker’s pay is increasing at the slowest pace ever. The news sent dollar bulls running for cover, but St. Louis Fed head Bullard eased their pain by saying the Fed was still on course to increase rates in September. China PMI data showed the economy continues to slow, putting pressure on commodities. The euro inched higher on Friday but gave back these gains after a sharp fall in the re-opened Greek stock market. And commodities got hit as the possibility of increased production of oil by IRAN combined with the Chinese data to put pressure on both oil and gold.

Currencies today 8/3/15. American Style: A$ .7269, kiwi .6590, C$ .7601, euro 1.0959, sterling 1.5576, Swiss $1.0341. European Style: rand 12.7247, krone 8.2054, SEK 8.6414, forint 280.75, zloty 3.784, koruna 24.654, RUB 62.745, yen 124.19, sing 1.3767, HKD 7.7527, INR 64.04, China 6.1169, pesos 16.1243, BRL 3.4587, Dollar Index 97.544, Oil $46.11, 10-year 2.20%, Silver $14.65, Platinum $972.50, Palladium $620.97, and Gold. $1,089.10

That’s it for today. I had a great week with my family up in Vancouver/Whistler. We spent a good amount of time hiking up in the mountains of Whistler, and even got to see a mother bear and her cub (we definitely kept our distance). An added treat for me was that the Ironman Canada event was held during our stay in Whistler, so we got to cheer on all of the participants during what ended up being a cold and rainy day. It was definitely good encouragement for me to get training a bit harder for my own Ironman which is quickly approaching. I spent the second half of the week speaking at the Sprott/Stansberry investment conference in Vancouver. It was very well attended with a bunch of smart investors looking to pick up bargains in the resource space. Enough of my travel log – time for me to hit the send button. I hope you have a Marvelous Monday and a great start to your week!

Chris Gaffney, CFA
EverBank World Markets