Today’s April non-farm payroll release showed 211,000 jobs added which was above expectations of 190,000 jobs created and the prior month’s reading was revised down by 19,000 jobs to 79,000. The unemployment rate edged lower to 4.4% from March’s reading of 4.5% as did the participation rate to 62.9% from 63%. After the stronger than expected Q1 employment cost index data (3.2% quarterly annualised or 2.4% yoy), an average hourly earnings figure of 2.5% yoy struck a happy medium supporting an improving but not excessively hot labour market. Jobs data in Q1 was skewed as warm weather boosted job creation in January and February, particularly in the construction sector, and the low March figure likely reflected some ‘front-loading’. Importantly, the rate of jobs growth is expected to slow down as the economy moves towards full employment so needs to be viewed in conjunction with the wage data.
Clearly June still remains a live meeting for another rate rise. The Fed’s April meeting statement viewed the recent spate of weaker data points as transitory: clearly policy remains data dependent but it is likely to take sustained economic weakness or a big geopolitical shock to derail the Fed from two additional 25 basis point hikes as the year progresses. Inflation indicators have so far remained benign: for example, the March core PCE is running at 1.6% yoy although the FOMC statement views inflation as running close to their 2% longer run objective. The recent weakness in oil and commodity prices has also helped temper forward inflation expectations.
In the absence of any detail on Trump’s tax reform and fiscal stimulus initiatives and the difficulty of knowing what he can actually get passed by Congress we see little evidence to convince us that US growth can sustainably be boosted back above the 3% level: the structural trends of poor demographics, secular stagnation and elevated global debt levels remain firmly entrenched. Yesterday Trump did manage to get the healthcare reform bill passed by Congress on its second attempt but it still remains to be seen whether the bill can overcome opposition in the Senate to actually be passed into law.
Our view remains that the Fed will remain ahead of the curve and the yield curve will flatten so we continue to favour positioning at the long end of the curve. Market attention is now likely to be on commentary from the Fed speakers notably with Vice Chair Stanley Fischer due to speak on monetary policy later today. Janet Yellen is also due to speak but it is unclear whether she will give much insight on monetary policy as she is speaking on ‘125 Years of Women’s Participation in the Economy’. With the VIX index of volatility trading near 10 year lows global risk appetite is robust helped by markets having already priced in a gradual path of increases in the federal funds rate and in Europe by polls suggesting Emmanuel Macron will win Sunday’s final round of the French Presidential Election against Marine Le Pen by a wide margin.