The employment data remains one of the strongest data points on the US economy and today’s non-farm payroll data was no exception showing 242,000 jobs added in February which exceeded expectations of 195,000 jobs added. The prior figure was revised up from 151,000 jobs to 172,000 jobs. The unemployment rate was unchanged at 4.9 percent and the labour force participation rate increased to 62.9 percent from 62.7 percent in January. On a weaker note, average hourly earnings came in below expectations at 2.2 percent yoy which was down from the prior month’s reading of 2.5 percent yoy and average hours worked edged back to 34.4 from 34.6 in January.
Recent US economic data releases have continued to point to patchy and uneven growth although some of the data points have improved since the start of the year. Areas showing improvement included durable goods orders for January, excluding defence and aircraft, which were up 3.4 percent mom on the revised number, the January Chicago Fed National activity Index which was stronger than expected and Q4 GDP was revised up to 1 percent quarterly annualised. The core PCE deflator also rose to 1.7 percent yoy, a pick up from the prior reading, and the highest figure since February 2013. However, data on the manufacturing sector has remained weak; the February ISM, while exceeding expectations, remained in contractionary territory for the fifth consecutive month. The ISM non-manufacturing composite weakened slightly to 53.4 in February remaining in expansionary territory although the employment index fell into contractionary territory for the first time since February 2014. However, the dollar index has been strengthening again which will continue to tighten financial conditions in the US.
These data releases suggest a Fed rate increase is still a possibility in 2016; but given more dovish comments from the Fed speakers of late, a weak global backdrop and dollar strength it seems most probable that the Fed will exercise caution at the next meeting and continue to observe how the situation develops. The Fed futures implied probability for a rate hike was only 8 percent for the March meeting ahead of today’s data and this remains unchanged at the time of writing. Expectations for another rate rise this year by December had risen to 66 percent (from 29.6 percent mid-February) ahead of today’s data and remain unchanged at the time of writing.
Despite the recent spate of stronger data we think the risk to US growth remains to the downside; even if another rate rise is warranted this year we expect the Fed will remain ‘ahead of the curve’ and the yield curve will flatten favouring positioning at the long end on a duration weighted basis. The global backdrop remains extremely challenging with growth estimates continuing to be revised down in both developed and developing countries and significant imbalances remain. A weakening growth environment favours positioning in higher quality bonds, especially value credits, where there is a ‘margin of safety’ (actual spread versus rating implied spread).