Today’s non-farm payroll data release for April recorded only 160,000 jobs added which was below expectations of 200,000 and compares with a downwardly revised 208,000 jobs added in March. The unemployment rate was unchanged at 5% and the participation rate edged down to 62.8%. Average hourly earnings edged up to 2.5% yoy against expectations of a 2.4% yoy increase and average hours worked edged up to 34.5 from 34.4 in April.
Jobs growth has been one of the strongest data points on the US economy but today’s data also showed some signs of the weakness that has been evident in other data points. US Q1 GDP data showed the economy only expanded 0.5% on a quarterly annualised basis with ‘sluggish consumption’ growth of 1.9% and business investment falling 5.8% was particularly concerning. Weakness has also been evident in broad based indicators such as the Chicago Fed National Activity Index, a composite of 85 monthly indicators where a positive/negative reading corresponds to growth above/below trend, with the March reading at -0.44 and the prior reading revised down to -0.38. This is not yet at recessionary levels but growth looks anaemic at best. It is worth keeping an eye on the inflation data which while still benign, has edged higher over the past year: in March core PCE was 1.6% yoy and CPI ex food and energy was running at 2.2% yoy.
Any FOMC decision remains data dependent, and the Fed has been keen to keep its options open and not to rule out a June rate rise, but this looks extremely unlikely at this stage. At the time of writing the Fed Funds futures market is only pricing in a 4% chance of this, compared to 10% ahead of the employment figures and over 70% at the start of the year. Even if the data improves and another US rate rise is warranted later 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. In a world where around USD10 trillion of government bonds trade at negative yields, high quality Eurobonds offering positive yields, particularly from creditor nations, look compelling investments.