Macroeconomics rule

China's Purchasing Manager's Index rose 0.1 to 53.3 in July, with a reading above 50 a sign that the economy is expanding, according to data released August 1 by the National Bureau of Statistics.

The Institute for Supply Management in the US reported August 3 the Purchasing Manager's Index jumped 4.1% to 48.9% in July. This was the 18th consecutive month the manufacturing sector failed to grow while the overall economy grew for the third consecutive month, the ISM reported. But the non-manufacturing index dropped 0.6% to 46.4%, the ISM reported August 5.

That same day, the US Census Bureau reported new orders for manufactured goods advanced 0.4% in July, following a 1.1% increase in May, with factory orders up four out of the last five months.

Most economists, even those at the US Federal Reserve Bank, believe the recovery will be shallow and uneven, and thus far, the data appears to confirm these projections. The recovery, too, may also engender still high rates of joblessness and recent data continues to point in that direction.

While the US unemployment rate appeared to steady out in July, the Canadian unemployment rate was unchanged at 8.6%, although another 45,000 jobs were lost, according to Statistics Canada.

US July non-farm payrolls dropped 247,000 while the unemployment rate dipped to 9.4%, down 0.1 percentage points, according to data released Friday by the Bureau of Labor Statistics.

Consensus estimates had projected a decline of 330,000 and an increase of 0.1 percentage points to 9.6%.

This was the smallest drop in non-farm payrolls since August 2008.

Non-farm payrolls for May and June were revised up a cumulative 43,000.

"From May to July, job losses averaged 331,000 per month, compared with losses averaging 645,000 per month from November to April," the BLS said. "Since December 2007, payroll employment has fallen by 6.7 million."

Manufacturing employment fell by 52,000 in July and has declined by 2.0 million since the recession began.

The data out of both Canada and the US suggests the rate of job destruction has slowed, but that is not to say either country is seeing job creation.

Now markets will wait to see if the US Federal Reserve Bank is more optimistic about the economy when it convenes for its two-day meeting August 11-12. The Fed is not expected to change overnight, inter-bank lending rates nor undertake additional quantitative easing measures, a step taken by the Bank of England that was announced August 6, taking markets by surprise. While BOE left rates unchanged at 0.5%, the bank increased the size of its asset purchase program by £50 billion to £175 billion, suggesting the economy was unsteady at best. 

"The world economy remains in recession, though there have been increasing signs that output in the UK's main export markets is stabilizing," the BOE said. "Financial market strains have eased and banks' funding conditions have improved a little, although financial conditions remain fragile."

Given the unevenness of the macroeconomic data recently released, the rally in global crude futures should be capped at $75/barrel through the end of the third quarter. What crude traders appeared to have done is prematurely priced in a pick-up in oil demand.
Oil demand in the US has recently shown signs of improvement. On a four-week moving average, total US oil demand at 18.94 million b/d was 1.189 million b/d below the same four weeks 2008, according to the most recent data from the US Energy Information Administration. One month ago, US oil demand on a four-week moving average was 1.976 million b/d below the same four weeks 2008.

Given the current state of the US economy, oil demand is not likely to continue to improve at that pace, not even in the fourth quarter, particularly with unemployment rates this high.

But look for some slight upward revisions to the global oil demand in the monthly oil reports due out this week from EIA and the International Energy Agency.