Today’s March non-farm payroll release showed 103,000 jobs added which was below expectations of 185,000 jobs created although this follows a strong report in February where jobs added were revised up by 13,000 to 326,000. Historically, March has tended to come in below consensus and there could be some weather related impact. The unemployment rate was unchanged at 4.1% from the prior month’s reading and the participation rate edged lower to 62.9% from 63%. Average hourly earnings grew 2.7% yoy, a touch higher than last month’s reading of 2.6% yoy.
Jerome Powell recently commented: ‘There’s no sense in the data that we’re on the cusp of an acceleration in inflation’ and today’s data continue to point to an improving labour market but still benign inflation and wage backdrop. The past month has seen the US Treasury yield curve bull-flatten: rates at the short-end have continued to move higher as the Fed tightens and UST issuance has targeted this part of the curve while yields at the long-end are being underpinned by a benign medium-term inflation outlook. Secular trends such as demographics are constraining the growth and inflation outlook and we see any short-term uptick in the numbers as being cyclical and transitory in nature.
Our base case looks for up to 2 further 25 basis point Fed Funds rate hikes, most likely in June and September. The combination of higher rates and balance sheet tapering should start to act as a brake on US growth into the end of the year and 2019. Any additional rate increases beyond that are dependent on the impact of tax cuts, fiscal policy and any fallout from a more protectionist trade stance on the US and global economy. In our opinion, fiscal stimulus at this stage of the cycle only adds to the risks: the more aggressive the Fed becomes in tightening policy the greater the risk the US moves into recession. The US expansion is ‘long in the tooth’ having run for 105 months and the vast majority of tightening cycles since 1950 have ultimately ended in recession.
We favour portfolio positioning at the long end of the curve and with a bias to higher quality credits as we believe the Fed is ahead of the curve and that the yield curve will continue to flatten with the potential to eventually invert in the event of a US recession.