Today’s December non-farm payroll release showed 156,000 jobs added which was below expectations of 175,000 jobs created although the prior month’s reading of 178,000 jobs added was revised up to 204,000. The unemployment rate edged higher to 4.7% from November’s reading of 4.6% and the participation rate was unchanged at 62.7%. Although, average hourly earnings increased to 2.9% yoy, up from the previous month’s figure of 2.5% yoy, and above expectations of 2.8% yoy. Wage data, following on from the Fed minutes talking of greater inflationary risks if the unemployment rate dropped below its longer-run normal level, is likely to be closely monitored by the market; but Treasuries have already priced in a lot of risks at current levels and at the time of writing there was a small repricing in the Fed Funds Futures.
Interestingly, the next rotation of the FOMC will also take place this month. The FOMC is comprised of up to twelve voting members: seven of them are from the Board of Governors plus the President of the New York Fed who is a permanent voting member and four members from the other eleven regional Reserve Banks who serve a one year term on a rotating basis. The rotating seats are filled so as to ensure regional diversification with one member selected from each of four groups: First, the Boston, Philadelphia and Richmond Fed; Second, the Cleveland and Chicago Fed; Third, the Atlanta, St. Louis and Dallas Fed; Fourth, Minneapolis, Kansas City and San Francisco.
The current FOMC is made up of only ten voting members because only five out of seven seats from the Board of Governors have been appointed: Janet Yellen, Stanley Fischer, Daniel Tarullo, Jerome Powell and Lael Brainard. The President of the United States has to nominate candidates to the Board of Governors who then must be confirmed by the US Senate. Under Barack Obama, Allan Landon and Kathryn Dominguez were nominated for the Board but the required confirmation hearings by the senate never took place. Clearly, Donald Trump is likely to put forward his own choice of candidates.
This month the next rotation on the board will take place in which we will see Loretta Mester (the Cleveland Fed President), Esther George (the Kansas City Fed President), James Bullard (the St. Louis Fed President) and Eric Rosengren (the Boston Fed President) replaced by Patrick Harker (Philadelphia Fed), Neel Kashkari (Minneapolis Fed), Robert Kaplan (Dallas Fed) and Charles Evans (Chicago Fed).
One issue is whether this new line up make much difference to the voting tilt given that outgoing voters Mester, and George and Rosengren have all dissented (wanting instead to raise rates) at various FOMC meetings. Of the incoming voters Evans, who has been a voting member before, is a known dove the other 3 Fed Presidents are all newcomers to the voting committee. Kashkari is also perceived to have a dovish bias.
The other 2 incoming-voters’ comments are seemingly more centrist seeming to support some increase in rates but at a gradual pace. Robert Kaplan favours taking ‘steps to “normalize” monetary policy because there is a cost to excessive accommodation in terms of penalizing savers, as well as creating potential distortions and imbalances in asset allocation, investing, hiring and other business decisions.’ That said, he clearly advocates ‘the removal of accommodation should be done gradually and patiently. I am cognizant that, from a risk-management point of view, our monetary policy tools are asymmetrical at or near the zero lower bound—that is, it is easier to tighten policy than to ease policy at this point in the normalization process.’ While Patrick Harker noted:‘A lower natural funds rate has implications for the speed at which current monetary policy should normalize. The lower the natural funds rate, the closer the current funds rate will be to that level, which means policy will have a shorter distance to travel to full normalization.’
We are less optimistic on growth than many in the market. The short term impact of Trump’s fiscal policy is likely to be an increase in the budget and current account deficits and with the FOMC likely to tighten more quickly than might have otherwise been the case if growth improves. However, we expect the US Treasury yield curve will flatten as investors look through the short term growth boost and start to factor in the combination of a stronger dollar and higher short rates on the longer term outlook for the US economy.