Jobs Take Backseat to Greece’s Austerity Vote

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The US labor market took a step back in June but the long-term trend toward healthier job growth remains intact. However, for now, the markets are preoccupied with the possibility of Greece exiting the euro zone on the heels of its “no” vote on the bailout referendum.

The June jobs report was unimpressive. US nonfarm payrolls surpassed the key 200,000 level and unemployment fell to its lowest level of the recovery. However, our biggest takeaways were generally discouraging:

  • Job gains for the previous two months were revised downward. April's gains were revised down to 187,000 from 221,000, while May's job gains were revised down to 254,000 from 280,000. That's a loss of 60,000 jobs between the two months.
  • Job gains were less broad-based. Business services, health care, financial services and transportation sectors added jobs. But there was little or no job creation in the construction, manufacturing, wholesale trade, information and government industries. There were also job losses in industries such as mining.
  • Temporary employment made up a bulk of new jobs. The largest gains came from professional and business services but one-third of the positions were temporary. This means that about 10% of the job growth in June was created by temporary employment. That's not a strong sign of confidence by employers. However, we recognize that hiring temps is often the first step companies take when they're growing. And they're typically followed by permanent job hiring.
  • There were no signs of wage growth. Average hourly earnings were flat in June, which lowers the year-over-year rise in wages to 2% from 2.3% in May. But it is worth noting that other measures of wage growth do show improvement.

However, there were some bright spots in the report. Historical areas of weakness continue to improve: There were 381,000 fewer long-term unemployed persons in June. People out of work 27 weeks or more as a percentage of total jobless continues to fall, down to 25.8% of total unemployed. And the average duration of unemployment has finally fallen below 30 weeks. It now stands at 28.1 weeks. Involuntary part-time employment dropped by 147,000 to 24.1% of the total number of part-time employees.

Still, market observers and investors are paying more attention to what's happening outside of the United States, particularly the evolving debt crisis in Greece. This should not come as a complete surprise. With the US economy on more solid footing after a disappointing first quarter, it seems that international events pose a greater threat to market stability—and to the Federal Reserve's timeline for raising interest rates—than the domestic economy.

What's Next for Greece?

Without question, Greece's vote to reject the Troika's proposed austerity measures will roil markets. We expect this vote to result in one of two outcomes. The first scenario is that creditors decide not to negotiate with Greece, its banking system dries up and lengthy talks ensue as to how Greece will leave the euro zone. It will likely take a lot of work to unwind the alliance given that leaving the European Monetary Union hasn't been contemplated. The second option is that creditors decide to negotiate with Greece and lengthy talks ensue. In either event, markets will likely have time to digest what's happening and gain comfort with the end result.

In our view, Greece now looks reasonably likely to leave the EMU, at least on a temporary basis and possibly permanently. The bigger issue is contagion. Currently, we believe the risk of contagion across the euro zone is still relatively limited, given that peripheral nations such as Spain are in better economic shape than they were when the initial Greece crisis erupted. Plus, the proactive stance the ECB has taken to support the EMU and the policy tools it has at its disposal, if needed, inspires confidence that contagion can be held in check.

What we worry about is that a confluence of events could send the market into a tailspin. Not only is Greece in serious straits, but also China has experienced a substantial selloff. And US investors are becoming rattled by Puerto Rico's revelation that it will not be able to make its debt payments. We expect a significant increase in peripheral bond spreads while Germany's bund yields could contract. Meanwhile, euro-zone equities are likely to come under pressure, in particular European banks. And the euro is likely to weaken.

In the short run, investors should look to limit downside volatility in their portfolios as we weather international storms. At the same time, they should look for buying opportunities as we expect the euro zone to emerge stronger from this experience.

Kristina Hooper is the US investment strategist and head of US Capital Markets Research & Strategy for Allianz Global Investors. She has a B.A. from Wellesley College, a J.D. from Pace Law, a master's degree in labor economics from Cornell University and an M.B.A. in finance from NYU, where she was a teaching fellow in macroeconomics.

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© Allianz Global Investors

© Allianz Global Investors

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