Today’s December US non-farm payrolls release reported 145,000 jobs created which was below expectations of 160,000 jobs. The prior month’s figure was downwardly revised to 256,000 jobs from 266,000. The unemployment rate was unchanged at 3.5%, a 50 year low, and the participation rate was unchanged at 63.2%. Average hourly earnings came in softer than expectations rising 2.9% yoy compared to the prior month’s increase of 3.1% yoy. Overall, with the 3 month average job adds averaging 184,000 per month and wage inflation erring on the softer side (the 2.9% yoy increase is the lowest rate of increase since June 2018) the Fed is likely to see this as supporting their wait and see stance. Broadly, today’s release was supportive for bond markets given the benign wage data and USTs are trading little changed.
In terms of other US economic releases this week, the December non-manufacturing ISM exceeded expectations and remains in expansionary territory at 55 and strengthened from November’s reading of 53.9. This is in contrast to continued weakness in the December manufacturing ISM which at 47.2 hit its lowest level since June 2009. Clearly, sentiment has been helped by the de-escalation in the trade tensions between the US and China with a Phase I agreement due to be signed next week.
Neverless, our view remains that US growth will remain anaemic in 2020 so the Fed may well have to cut interest rates again. While the US consumer remains robust, business investment remains weak and a number of uncertainties still remain on the trade front as the US and China still have a large number of tariffs in place, despite the Phase I agreement, and they are still to enter into Phase II of negotiations. Plus, the US and Europe are still to reach agreement on tariffs and taxes in a number of areas. The World Bank’s updated forecasts, released earlier this week, look for US growth to slow to 1.8% this year and 1.7% in 2021 and 2022 noting: “In the near term, the slowdown reflects the negative impacts of lingering uncertainty and a waning contribution from tax cuts and government spending, which are only partly offset by accommodative monetary policy.” Our central case is for a continuation in the US yield curve flattening with the curve moving flat to the funds rate over time; we expect to see 10-year yields moving to price in further easing. Of course, trade developments may delay or accelerate this move. We do feel that there is upside to prices along the curve given our economic outlook, but a period of economic data assessing could involve range-bound trading for the immediate period.