Today’s October non-farm payroll release showed 261,000 jobs added which was below expectations (for a post hurricane rebound) of 313,000 jobs created. The prior month’s reading was revised up to 18,000 from -33,000 and the two month net revision was +90,000. The unemployment rate edged lower to 4.1% from September’s reading of 4.2% although the participation rate fell to 62.7% from 63.1%. The average hourly earnings figure was below expectations growing 2.4% yoy and down from last month’s reading of 2.9% yoy: this follows on from a still relatively muted Q3 employment cost index report which was in line with expectations and registered a quarterly increase of 0.7%. With the caveat that there is still likely to be hurricane related distortions in the data, these numbers point to an improving labour market but also to a still subdued inflation and wage picture: investors continue to expect another rate hike at the December meeting on the back of these numbers.
Yesterday, after a few weeks of fuelling much speculation with his tweets, Donald Trump finally confirmed Jerome Powell as his nomination for the next Fed chair, although the position will still need to be confirmed by the Senate. Powell had become the market front runner into the latter stages so although his appointment is seen positively it was expected: Jerome Powell already serves on the board as a governor and is perceived to imply a continuation of policy.
Also overnight the Republicans continued to try and move forward publishing a draft of the ‘Tax Cut and Jobs Act’. The corporate sector certainly gains as the tax bill in its current state seeks to cut the corporate tax rate to 20% from 35%. While it was also spun as a ‘middle-class tax cut’, it looks to offer more for the higher income earners. It phases out inheritance tax for the wealthy, reduces the tax rate for those earning USD400,000 to USD1m to 35% and even though the top 39.6% tax rate on income is retained it does not kick in until USD1m. The bill also contains some unpopular measures that are meeting resistance: for example, the proposal to curtail state and local tax deductions and eliminate mortgage interest deduction for new home loans above USD500,000. Overall, the proposals add USD1.5tn to the national debt over 10 years, matching the figure allowed under the Budget Resolution passed last month, but this is unlikely to sit well with the deficit hawks. Clearly, some negotiation and compromises are likely to be required to get the Bill to the stage of having enough votes to pass in both the House of Representatives and Senate.
Recent data points have pointed to the US economy growing at a ‘solid’ pace: notably 3Q GDP grew at a 3% quarterly annualised rate having expanded 3.1% in 2Q and the Conference Board Consumer Confidence figure reached its highest level since December 2000. That said, the 3Q breakdown shows volatile inventory gains contributed to 0.7% to the 3% GDP gain and underlying components such as real final sales to domestic purchasers showed a more modest expansion of 2.2% in Q3. Looking beyond the volatility of one individual quarter the rate of growth is less impressive: Q3 growth is up 2.3% yoy and post the GFC annual GDP growth has mainly been in the 1.5-2.5% range, except for 2015 when it touched 2.9%. Even the Fed’s latest median projections look for growth to run at 2.1% and 1.9% for 2018 and 2019 respectively. The issue is whether growth can sustainably be boosted above 3% and are the proposed tax changes really going to end up giving much of a sustainable boost on this front.
Importantly, the inflation data remains well behaved and with balance sheet normalisation also underway we still see the Fed taking a gradual and patient approach to raising rates. The announcement of Jerome Powell as the next Fed Chair implies continuity of policy going forward. Thus, our view remains that the Fed will remain ahead of the curve and we continue to favour positioning at the long end of the yield curve.