Daily Agenda: U.S. Employment Takes the Spotlight

German industrial production data falls short; Icahn buys significant holding in LNG operator; Switzerland sees record currency reserves.


Andrew Harrer

Today’s Department of Labor employment situation release for July is a key measure behind macro sentiment and monetary policymaking. Increasingly however, bond market indicators clearly indicate that investors generally are resigned to a rate hike by the Federal Reserve before year’s end regardless of specific timing. For the most part, bond markets shrugged off the unexpectedly weak employment cost index released last week was shrugged off by bond markets, suggesting that hawkish commentary by the Fed holds more sway than data inflections. With a dovish bias remaining among most other developing-markets central banks, a potentially more important question facing investors is not when the Fed will commence tightening, but what the impact of divergence between policymakers will mean for global market dynamics.

U.S. labor market continues to improve. July nonfarm payrolls expanded by 215,000, according to a Department of Labor report released this morning, roughly in line with consensus forecasts. June payroll data was revised upward, while both the headline unemployment rate and participation rate remained unchanged. Employment growth improved across most industry segments, led by retailing and health care.

Euro zone industrial production data disappoints. German industrial production for June contracted by 1.4 percent month-over-month versus consensus forecasts for a modest expansion. The shortfall for German factories was particularly surprising after Thursday’s strong June new orders release. Meanwhile, French production also fell in June by 0.1 percent from the prior month’s reported level.

Carl Icahn makes a move for LNG export operator. Icahn Associates Corp., the investment firm controlled by legendary activist investor Carl Icahn, revealed a 8.2 percent holding of shares outstanding of Cheniere Energy yesterday. Houston–based Cheniere is focused on the liquid natural gas market and is about to have its Sabine Pass terminal in Louisiana begin making shipments in the coming months.

Chinese stocks end the week on a high note. The Shanghai Composite index ended trading on Friday up sufficiently for the day to lock in a positive return for the week after media reports of an additional 2 trillion yuan ($322 billion) facility that authorities are considering advancing to China Securities Finance Corp. Separately, the initial public offering for state-controlled China Railway Signal & Communication Corp. in Hong Kong today was received tepidly by investors, trailing the Hang Seng index despite having priced near the lower end of the indicated range. This marked the first major IPO since the sell-off in mainland-listed shares began in late June.

SNB currency reserves hit record level. According to data released on Friday by the Swiss National Bank (SNB) the central bank’s foreign currency reserves rose to record levels in July soaring by 3 percent to exceed $540 billion. Despite abandoning the cap on Swiss franc appreciation in January, the significant build-up in reserves prior to that benefited by a recent decline against both the euro and the U.S. dollar.

Portfolio Perspective: Shakeup In Macau Rattles Gaming IndustryNeil Tisdall, Scotiabank

Global gaming revenues have fallen noticeably following the crackdown on corruption and money laundering by the Chinese government. Macau has been particularly affected, with gaming revenues in the Chinese Special Administrative Region expected to slump by one third this year to the lowest since 2010. This represents a dramatic change from recent years, as gaming revenue had surged ten-fold since U.S. casinos were granted permission to operate in Macau in 2003. Revenue from gaming and entertainment in Las Vegas has advanced around 3 percent per year since 2011, but represents only a fraction of what Macau is capable of generating each year. Macau gaming receipts totaled $43 billion in 2014 compared with almost $6.5 billion in Las Vegas.

Despite the uncertainty surrounding casinos in Macau, global economic conditions remain generally supportive for the gaming industry. Growth in emerging Asia, a crucial market for Macau and its neighboring regions, should advance 6–7 percent annually to the end of the decade, creating a positive economic backdrop despite slowing growth in China.

Major U.S. casino operators derived roughly two-thirds of their total revenue from their Macau properties last year. Several operators have high exposure to so-called VIPs in Macau, who have either curtailed their gambling or moved their business to casinos in other jurisdictions after Beijing enforced anticorruption measures. If high-stakes gamblers are unable or unwilling to return to Macau, there are comparable casino options in Singapore and the Philippines, home of several multibillion dollar developments. U.S. casino presence outside of Macau is minimal, however, except for a major development in Singapore. A shift away from the world’s largest gambling center would cause a significant markdown for U.S. operators.

For the most part, U.S. based casino operators have suffered curtailed earnings to start the year, owing to sharp reductions in revenue from their holdings in Macau and mixed results stateside. Uncertainty will be a continuing theme in Macau as investors and high rollers alike wait for clarity, although long-term prospects for gaming on the peninsula remain upbeat given the size of the domestic Chinese market and the rapidly expanding middle class across developing Asia.

Neil Tisdall is an economist with Scotiabank in Toronto.