Markets: Disappointing non-farm payrolls interrupts risk rally, S&P500 ends down 0.7%, 10-year Treasuries rally 11bps but Dollar strengthens against Euro as peripheral spreads widen.

USA: Nonfarm payrolls rise 18k in June, well below mkt, unemployment rate rises 0.1pps to 9.2%.

USA: Wholesale inventories rise 1.8% mom in May, above mkt.

USA: Consumer credit rises $5.1bn in May, above mkt.

CAN: Employment rises 28k in June, above mkt, unemployment rate steady at 7.4%.

UK: PPI Input rises 0.4%mom/17%yoy in June, above market.

DEU: Current account surplus narrows EUR2.1bn to EUR6.9bn in May, below mkt.

FRA: Bank of France Business sentiment down 4pts to 99 in June.

ITA: IP falls 0.6%mom in May, to be up 1.8%yoy, below mkt.

CHE: Unemployment rate falls 0.1pt to 2.8% in June, at market.

SWE: Industrial orders increase 0.1%mom/8.6%yoy in May.

JN: Ecowatchers outlook index rises 4.1pts to 49 in June, above market.

CHN: Bus. climate index rises 1.8pts to 135.6 in Q2.

CHN: CPI rises 6.4% yoy in June, above mkt, PPI rises 7.1% yoy, above mkt.

CHN: Trade surplus widens to $22.27bn in June, above mkt, as import growth slows to 19.3% yoy.

THE DAY AHEAD...

CAN: Housing Starts (Jun), Senior Loan Officer Survey (Q2), Business Outlook (Q2)

FRA: Industrial Production (May)

ESP: House transactions (May)

DNK: HICP (Jun), Current Account (May)

NOR: CPI (Jun)

JN: M2 (Jun), Consumer Confidence (Jun), Machine Tool Orders (Jun P)

AUS: Housing Finance (May)

NZL: Electronic card transactions (Jun), House Prices (Jun)

Green shoots wilt a little as payrolls disappoint?

(Neither Friday's dataflow nor developments in Europe supported an extension of the almost fortnight-long rally in risk, with equities down solidly, Treasuries rallying, EU peripheral spreads out further (including another 23bp rise in 10-year Italian bond yields compared to the bund) and a weaker Euro (meanwhile the NZD has made a new post-float high - go figure).

(There wasn't much to like about the June US non-farm payrolls report. A mere 18k gain in non-farm payrolls, a 0.1pt decline in the average workweek, no change in average hourly earnings and a 0.1pt rise in the jobless rate to 9.2% were all disappointing. Whilst it is true that the seasonal factor applied to the June report was stern (135k greater than in June last year), the household employment measure was softer still (down 445k in June) and reinforces the weaker employment trend evident in recent months (see our first chart). Given what we know about the economy through much of Q2, a weaker labour market pulse shouldn't have been a great surprise. Still, we are hopeful that the resilience seen in the ISM-based employment indicators means that payroll growth will look significantly more healthy next month. Certainly with productivity growth slowing in recent quarters, even modest GDP growth has been associated with an increase in hours worked (see our second chart) and gains in employment. Meanwhile, with the unemployment rate remaining elevated relative to any reasonable estimate of the NAIRU, it is hard to see any sustained pressure on labour costs in the near-term at least (see our third chart) and thus any change in the position held by Fed Chairman Bernanke and the other doves on the FOMC.

(Over the weekend China released its June CPI, which rose to 6.4% yoy from 5.5% yoy in May (see our final chart). The higher than expected result was largely due to a recent surge in pork prices. Whilst headline inflation rose 0.3% mom, non-food prices were unchanged in the month as both raw material prices and the residence index (which includes rentals and utilities) fell. Our Chief Economist for China, Jun Ma, noted that his non-food inflation model (with lagged independent variables such as money supply, raw material price index and utility price index) shows that non-food inflation will be contained at 0.1% mom later this year. So as long as food prices (especially pork prices) begin to stabilize, the base effect will begins to turn favorable from late Q3 so that annual CPI inflation will fall quickly. His current forecast is that CPI inflation has peaked, will decline to 6% yoy in July, and will trend down towards 4% in November and slightly below 4% in December.

(The week kicks off quietly today with no noteworthy data in the US. In Europe the focus will be on any news that flows from a reported emergency meeting of top EU officials to discuss the second Greek package and growing pressures on Italy (according to Reuters, although the EC's President's spokesman denied that Italy was on the agenda). This morning the Financial Times is reporting that the new plan for Greece may also allow for a default on some of its bonds. The French IP report is also due. In Canada the BoC will release its Q2 Business Outlook Survey and Senior Loan Officer Survey. Locally, Australia will report housing finance figures for May and New Zealand will report electronic card spending for June.

(Over the remainder of the week, the US calendar includes a number of key economic reports and Fed events. The former includes the May trade balance (Tuesday), the June PPI and retail sales reports (Thursday) and the June CPI report (Friday). We imagine that Thursday's initial jobless claims report and Friday's NY Fed manufacturing survey will also be of some interest. As far as the Fed is concerned, the focus will be Tuesday's FOMC minutes and Wednesday's semi-annual monetary policy testimony before the House of Representatives. In Europe the dataflow is fairly light this week (CPI data across the region being the main focus), leaving the focus squarely on EU politicians and the struggling peripherals. In the UK, Tuesday's CPI report and Wednesday's labour market report will be the focus. China will print most of the remainder of its June dataflow on Wednesday, including the Q2 GDP report. Closer to home, in Australia there will be significant interest in Tuesday's NAB business survey. And despite being very dated, New Zealand's twice delayed quake-impacted Q1 GDP report is also of note.

Markets

NORTH AMERICA

USA: Non-farm payrolls rise 18k in June, well below mkt

(Headline payrolls rose just +18k following downward revisions to the prior two months: April was lowered to +217k from +232k and May was reduced to +25k from +54k as previously reported. The weakness was broad-based within the underlying categories. In the goods sector, construction shed -9k jobs versus -4k previously and manufacturing rose just +6k compared to -2k in May. Private service-sector hiring also slowed significantly (+53k vs. +70k previously), as net layoffs occurred in financial services (-15k vs. +14k), temp workers (-12k vs. -2k) and auto dealerships (-1k vs. +4k). Government layoffs continued (-39k vs. -48k). The unemployment rate backed up another tenth to 9.2% as household unemployment was unchanged but household employment declined by -445k (vs. +105k previously). The length of the workweek declined a tenth to 34.3 hours and average hourly earnings were unchanged in the month. We are hard pressed to find any redeeming qualities of this report, which did not reflect the improvement in the manufacturing ISM or the ADP data. If the soft-patch in hiring does not improve in July, the outlook for second half of the year will diminish.

USA: Wholesale inventories rise 1.8% mom in May, well above mkt

(Inventories were up 15.5% yoy. By contrast wholesale sales fell 0.2% mom and were up 14.5% yoy. The inventory-shipments ratio rose 0.1pps to 1.16 months.

USA: Consumer credit rises $5.1bn in May, above mkt

(Revolving credit rose $3.4bn and non-revolving credit rose $1.7bn.

CAN: Employment rises 28k in June, above mkt

( Employment rose most in the transportation and warehousing (15k), while it fell in professional, scientific & technical services (-19k). Following a decline in May, manufacturing unemployment showed a little change in June. Public sector added 51k employment in June, while private sector has added 22k employees. However, the unemployment rate was unchanged at 7.4%.

EUROPE

UK: PPI Input rises 0.4%mom/17%yoy in June, above market

( According to ONS, the output price for all manufactured goods rose 0.1%mom, mainly driven by surge in prices of food and other manufactured products. Core output prices rose 0.2%mom/3.2%yoy.

DEU: Current a/c surplus narrows EUR2.1bn to EUR6.9bn in May, below mkt

( Trade surplus widened 4pts to 14.8bn in May, above market. Exports grew 4.3%mom to EUR89.5bn, while imports grew 3.7%mom to EUR76.7bn.

FRA: Bank of France Business sentiment down 4pts to 99 in June

ITA: IP falls 0.6%mom in May, to be up 1.8%yoy, below mkt

( Consumer goods fell 0.9%mom, capital goods was down 0.1%mom, while energy rose 2.2%mom.

CHE: Unemployment rate falls 0.1pt to 2.8% in June, at market

SWE: Industrial orders increase 0.1%mom/8.6%yoy in May

( Industrial production grew 2.6%mom/13.4%yoy in May, well above expectations. The industry for non-metallic mineral products rose the most (20.7%mom).

JAPAN/CHINA

JN: Current account surplus narrows �155.3bn to �391bn in May, above mkt

JN: Bank lending including trusts falls 0.6%yoy in June

JN: Corporate bankruptcies rise 1.5%yoy in June

JN: Ecowatchers outlook index rises 4.1pts to 49 in June, above market

( The current conditions index rose 13.6pts to 49.6.

CHN: Business climate index rises 1.8pts to 135.6 in Q2

CHN: CPI rises 6.4% yoy in June, above mkt, the highest in three years

(The CPI rose 0.3% mom, driven largely by the recent surge in pork prices. However, non-food inflation was nil on a mom basis, as both raw material prices and the residence index (which includes rentals and utilities) fell. For example the clothing index fell 0.2% mom, and the residence index declined by 0.1%. PPI inflation came in at 7.1% yoy in June, slightly above the market consensus of 6.9%. But on a mom basis, the PPI was flat. This implies that yoy PPI inflation will fall visibly in the second half of this year.

Our non-food inflation model shows that non-food inflation will be contained at 0.1% mom later this year. As long as food prices (especially pork prices) begin to stabilize and the base effect begins to turn favorable from late Q3, inflation will fall quickly. Our forecast is that CPI inflation has peaked, will decline to 6% yoy in July, and will trend down towards 4% in November and slightly below 4% in December.

CHN: Trade surplus widens to $22.27bn in June, above mkt

(Export growth fell to 17.9% yoy in June, down from 19.4% yoy in May. Import growth, at 19.3% yoy in June (vs 28.4% in May), was much lower than the consensus of 25% and reflects mainly the fall in commodities prices as well as weaker demand for some commodities. Based on the recent trend of export orders, we expect export growth to slow further to 15% yoy in the coming few months.

KEY RELEASES

Source: Bloomberg Finance LP

AUS COMMENTARY

RBA's Guy Debelle speaks in defense of current account deficit

( RBA Governor Debelle asserted that Australia's current account deficit and composition of capital flows are not cause for alarm. He noted that over the past three years, there have been quite sizeable changes in the size and composition of Australia's current account and capital account. He ended his speech quoting a line from Hamlet: 'there is nothing either good or bad, but thinking makes it so'.

The week ahead?

( The highlight in the week ahead will be the monthly round of consumer and business sentiment indicators. On Tuesday the NAB business survey for June is due. The rebound in the final US ISM for June suggests some prospect for a slight rise in the NAB survey, following declines over the past two months. On Wednesday, the WBC/MI consumer sentiment survey is due. The weekly Roy Morgan consumer confidence index points to a sharp decline in sentiment over the past month, and we expect this to be mirrored in the WBC/MI sentiment index. Then on Thursday, the Melbourne Institute consumer inflation expectations survey is due. The survey period for both of these indicators extends from 4 to 10 July, and we suspect that both outcomes will be influenced by heightened commentary surrounding the Government's proposed carbon pricing scheme during that period. Although most responses will have been compiled ahead of the full details of the carbon pricing scheme being released by the Government on Sunday 10 July, extensive media commentary is likely to have influenced consumers' responses throughout the survey week. For consumers' inflation expectations, we would not be surprised to see this translate into a rise in inflation expectations in the month. Finally, housing finance figures for May are due Monday.

NZ COMMENTARY

The week ahead?

( Looking at the coming week's economic calendar, the first point of interest will be Monday's electronic card spending report for June. We think that a combination of lower fuel prices and a warmer than usual June (delaying spending on winter related items) have probably combined to reduce spending during the month. Thereafter, interest will probably centre on Thursday's much-delayed Q1 GDP report to gauge how the economy performed during the quarter in the face of the disruption caused by the earthquake that struck Christchurch on 22 February. We estimate that the economy grew 0.4% qoq, a much stronger outcome than seemed likely in the immediate aftermath of the earthquake (our estimate is marginally stronger than the RBNZ's June MPS estimate of 0.3% qoq). However, given significant uncertainties about how the earthquake will be captured in official statistics (with measurement difficulties underpinning the latest 1-week delay), our estimate is subject to larger than usual error bounds. Certainly, the estimates produced by Statistics NZ are likely to be treated with more than the usual caution, especially as they will be subject to greater than usual revision as more information on the impacts of the earthquake becomes available. As far as the remainder of the calendar is concerned, the June housing report from REINZ should also be released early in the week, whilst the June Food Price Index (Wednesday) and Business NZ-BNZ manufacturing PMI (Thursday) are also of note.

DIARY

AUSTRALIA

Today

Housing finance (May) [Total ex-refinancing: market 4.5%mom; previous 4.8%mom]

Tuesday

NAB business survey (Jun) [Business conditions index: previous 6]

Wednesday

WBC/MI consumer sentiment (Jul) [Previous -2.6%mom]

Thursday

MI Consumer Inflation Expectations (Jul) [Previous 3.3%]

Friday

No data

NEW ZEALAND

Today

Electronic Card Transactions (Jun)

[Retail: DB -1.0%mom/6.4%yoy, Mkt 0.4%mom, Previous -0.8%mom/7.8%yoy]

Tuesday

REINZ Housing Report (Jun tbc)

[Sales: DB 1.0%mom/13.8%yoy, Mkt n/a, Previous 6.4%mom/7.1%yoy]

REINZ House Price Index (Jun, tbc)

[Total: DB 0.5%mom/-0.9%yoy, Mkt n/a, Previous -1.8% mom/-0.7%yoy]

Wednesday

Food Price Index (Jun) [Previous 0.5% mom]

Thursday

Business NZ Performance of Manufacturing Index (May) [Previous 51.5]

GDP (Q1) [DB (P) 0.4%qoq/0.5%yoy; Mkt 0.3%qoq/0.5%yoy; previous 0.2%qoq/0.8%yoy]

Friday

No data

DIARY

Source: Deutsche Bank Estimates Reuters and Bloomberg Finance LP