September’s non-farm payroll released today showed 156k jobs added which was below expectations of +172k. The prior month’s reading of +151k was revised to +167k. The unemployment rate went up to 5% (versus expectations for 4.9%) and average hourly earnings came in at 2.6%yoy, from of 2.4%yoy in August.
For us, the key point is that US growth remains patchy and weak; the IMF cut its US growth forecast for 2016 to 1.6% from 2.2% and downgraded 2017 to 2.2%. In fact since the GFC US growth on an annual basis has been 2.5% or above in only 2 years one of which was 2015: this paled with the more buoyant decade or so pre-GFC. While indicators such as 2Q GDP have been revised up to 1.4% on a quarterly annualised basis and the September ISMs for both manufacturing and services showed improvement indicators such as the Chicago Fed National Activity Index, a broad based indicator of 85 economic variables, fell to -0.55 in August.
The IMF’s updated World Economic Outlook earlier this week noted ‘Some risks flagged in recent WEO reports have become more pronounced in recent months, including those associated with political discord and inward-looking policies, or secular stagnation in advanced economies. Other risks, such as rising financial turbulence and capital pullbacks from emerging market economies, seem to have become less prominent, but they still remain. On balance, downside risks continue to dominate.’ We would add negative demographic trends, disappointing productivity growth, rising inequality, weak business investment and high debt levels to a list of things to be concerned about. All this points to a continuation of the period of insipid growth and benign inflation.
Faced with this backdrop, we expect that the Fed will remain ahead of the curve and that any interest rate increases are likely to be extremely gradual; many of the forces that have been driving neutral rates to lower levels will remain entrenched anchoring interest rate expectations at the long-end of the curve where we favour positioning. We expect further flattening of the yield curve. High levels of uncertainty in global markets makes high quality bonds from creditors, particularly those offering positive yields, one of the most attractive places to be positioned.