On Wednesday evening we had a glimpse of the FOMC’s recent thoughts via the release of the 15th March minute s. Some of the comments are particularly interesting such as: 'some participants viewed equity prices as quite high relative to standard valuation measures', and also 'prices of other risk assets, such as emerging market stocks, high yield corporate bonds, and commercial real estate, had also risen significantly in recent months'. The fact that these specific asset classes were mentioned in the minutes indicates that the Fed is clearly aware of the stretched pricing in certain classes.
Little more was mentioned in regards to the continued path of interest rates and we maintain our view that the likely path is higher. We are looking for two further rate hikes which will push the upper funds rate to the 1.5% level by the end of this year or early 2018; which we also feel is totally discounted in the bond market.
The observers awaiting these minutes were more interested in what the FOMC’s thoughts are on the balance sheet debate. Several comments were registered such as: 'provided that the economy continued to perform about as expected, most participants anticipated that gradual increases in the federal funds rate would continue and judged that a change to the committee’s reinvestment policy would likely be appropriate later this year'.
Previously the market was looking for so called ‘tapering of the reinvestment of the balance sheet’ to be on next year’s agenda, not on the table this year. Our take is that the Fed favours letting bonds roll off rather than looking to officially sell securities, and it will let the market know well in advance of time. With all things being equal, the central bank appears to favour tapering reinvestment this year, not in 2018, and while some FOMC members wish to align the tapering to a given Funds rate target, others want to make it data dependent. We expect this balance sheet debate will continue over future meetings.
The bond market took the minutes in its stride marginally unchanged from Wednesday morning’s levels although the stock market (S&P Index) swung from +0.7% to -0.3% on the back of the ‘high relative’ asset pricing comments.
So onto today’s non-farm payrolls (NFP) release, after Wednesday’s very strong ADP employment number of +263k (versus market calls for +185k), which was in turn followed by weaker than expected PMI and ISM non-manufacturing data. The ISM non-factory employment gauge was released at the weakest level since August and the non-factory prices-paid index falling by most in four years. Broadly, the opposite of the ISM and PMI manufacturing release on Monday, but given that the service sector jobs account for over 80% of US private sector employment it was really anyone’s guess on the NFP release but expectations were for a +180k number.
DRUM roll, and BOOM,
US non-farm payrolls for March were just +98k with the previous two months data adjusted by -38k, the unemployment rate dropped to 4.5%. Average hourly earnings came in at 0.2% which is annualised at +2.7%, down from 2.8% the previous month. So a weaker headline report than expected, except for the unemployment rate which given the participation rate was stable at 63% is a bit of a surprise.
Have a great sunny weekend; we try again on Monday...