Wealthy Nations Daily Update - Brazil

The August US non-farm payroll data, which is historically quite volatile and very often revised was released with the headline below expectations with 173,000 jobs created against calls of 217,000. However, the revisions to the two previous months was a net increase of 44,000 and so a quite neutral overall outcome. The unemployment rate fell to 5.1% against expectations of 5.2% with the labour force participation rate dropping 0.1% to 62.6% which will be taken as explaining the unemployment rate drop.The most important indicator in the report was a rise in average hourly earnings to 2.2% from 2.1% last time and average weekly hours also increased to 34.6 from 34.5.

At the time of writing, there are only three FOMC meetings left this year with the next one on September 16-17. Up until the recent bout of market turbulence the FOMC could be seen as erring slightly closer to “lift-off” in September by lowering the prerequisite to “some improvement in the labor market” suggesting job increases above 200,000 per month in July and August could be sufficient to tempt the Fed to a September rate rise. Although the August headline failed to reach this level, the overall average remains near to the Fed’s indicated trigger point and the average earnings increase could be a swing factor for a near term move.

The key point is that zero interest rates are not normal and the Fed is looking to begin the process of interest rate normalisation, but policy is still likely to remain accommodative and the trajectory and pace of further interest rate rises slow. Now the Fed will have to weigh up the improvement in the US economic data versus any external weakness, US dollar strength and financial market turbulence making the decision more finely balanced. Low inflation, exacerbated by weaker commodity prices and a stronger dollar, as noted by Stanley Fischer, the Fed Vice Chair, at Jackson Hole are not deal-breakers for a rate rise; "Given the apparent stability of inflation expectations, there is good reason to believe that inflation will move higher as the forces holding down inflation dissipate further."

Provided a central bank is ahead of the curve, yield curves typically flatten as inflationary expectations decline. In the last three tightening cycles the short-end of the bond market has delivered losses to investors, however, the long-end has tended to perform much better. We expect any move by the Fed to start to raise rates will be well ‘ahead of the curve’ and the yield curve should remain quite flat, favouring positioning at the long-end.