Friday’s non-farm payroll data for January painted a mixed picture showing 151,000 jobs added, which was below expectations. Conversely, the unemployment rate edged down to 4.9% and average hourly earnings picked up to 2.5% yoy against expectations of a 2.2% yoy increase. Average hours worked also increased to 34.6 from 34.5 in December.
US jobs data has been a key focus of investors for several years now. In fairness, jobs growth has been one of the strongest data points for the US economy, so from that point of view, it is understandable. However, employment and unemployment conditions for today are driven by decisions made some time ago, and so are usually a lagging indicator.
Last week we highlighted that the US ISM manufacturing index had registered its fourth consecutive monthly decline and this week we had evidence that even the services sector has started to show some signs of a slowdown. January’s ISM non-manufacturing index fell to 52.1 which marks the weakest reading since February 2014 and doesn’t exactly inspire confidence.
Unsurprisingly US Treasuries (UST) rallied again with the 10-year yield falling to 1.84%, down 8 bps from the end of the prior week. US high yield, which we are closely following for signs of stress in the US financial system, saw spreads nudge up above 800 bps once again, closing the week at 802 bps over UST. Although off the wides of late January (high 818), this is well above the spread of 686 that was recorded as we entered 2016.
As we said a month ago, “in this environment investors should be very wary of sub-investment grade bonds which have tended to perform badly in weak growth environments. In contrast high grade bonds, particularly at the long end, tend to perform much better. From discussions with clients it seems that most investors have too little in high grade bonds given the stage of the economic cycle so a continuation of heightened volatility in equity market could see a stronger flight to quality than might otherwise have been the case. We will be keeping an eye on both the Japanese yen and the US 10 and 30 year Treasuries for confirmation”
The yen started the year above 120 and despite the BoJ last week adopting negative on excess reserves, is trading much stronger now. Equally the US 30-year traded above 3% as we entered 2016, closing the week at just 2.67%. Neither seem to be showing any signs of reversing at present.