Too much job creation risked putting more upward pressure on interest rates; too little risked undermining confidence in US growth. In either case, the risk that US stock markets would react negatively to this month’s employment report were significant. With stock market indices just barely above their end-March low points and with 10-year interest rate seemingly ready to break through the 3% barrier, the importance of this month’s employment report was greater than usual.
As usually happens in this type of situation, everyone sees what he or she wants to see. One or two additional data points, such as April inflation or oil prices, are probably needed to tip the scales in one direction or the other over the next few days. But one thing is certain: it’s getting complicated.
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Last month’s employment report opened the way to optimism, but the March report swept it away. Job creations were very low, at 103,000, vs. an expected level of nearly 200,000, and new jobs in the first two months were revised down by 50,000 on average. Not only this, but wage increases are showing fewer and fewer signs of recovery. With the exception of finance, wage increases were down in most cases compared with last year or stationary at levels below the national average, which, as a result, is showing no sign of improvement. At 1.7% year-on-year in March, hourly wages in manufacturing increased at half their rate of mid-2016. The leisure and hotel sector, the nation’s third-largest employer segment with more than 10% of all positions, wages are now rising by less than 3% vs. 4.5% in the middle of last year. Although these results remain difficult to explain, they are certainly far removed from expectations, and neither the markets nor an administration tempted by protectionism can long ignore them.
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The reflation scenario that markets have been hoping for since mid-December is very sensitive. It needs just enough growth but not too much inflation, because this would run the risk of a sudden change in monetary policy. And the high valuations prevailing on the world’s stock and bond markets would probably not survive such a change. Last month’s employment report was rather negative in this regard, with a relatively mediocre rate of new job creation accompanied by an acceleration in wages. Although modest, this movement toward higher wages convinced many market observers that there was an increased risk that the Fed would raise its rates quicker than expected (for more on this topic, please see Slightly more jobs and wages in the USA, but much more risk for the bond market, dated February 2).
Today’s report was much better, maybe even good enough to suggest the dawn of a more virtuous phase of the US business cycle.
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A characteristic of bubbles is that they create temporary bouts of panic, most of which are short-lived, until one day… Developments in recent days have led to concern that we might now be in that end phase: there is a risk of markets getting carried away, capable of derailing international markets that have been overly reliant on the huge amounts of liquidity lavished upon them by central banks in the last ten years.
Against that background, the January US jobs report had particular resonance. The news was not great. Job creation rose slightly to 200,000 in January from 160,000 in December but, more importantly, annual wage growth accelerated to 2.9%, its highest level since June 2009. As a result, the report has given further momentum to the correction in the US bond market.
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After several months of hesitancy during which European stockmarket performance was consistently disappointing, left behind by almost all other major global asset classes, could there be more encouragement for investors in last few weeks of the year? Recent developments mean that it is very tempting to predict a rally. That is especially the case since, unless the European markets show signs of waking up soon, it will become increasingly difficult for European investors to maintain hopes of a long-overdue rally.
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In an environment dominated for months by mounting fears of the worst, pleasant surprises understandably create a fair amount of enthusiasm. That leaves economists with the thankless task of urging the enthusiasts not to get their hopes up too fast. The U.S. economy has shown encouraging signs in the past few months, including revival of the housing market, higher consumer sentiment, and, in the past few days, good news from the job market. But the country is not out of the woods yet.
- The jobless rate has fallen to its lowest level since 2008. A less heartening statistic, however, is that private-sector employment has yet to recover to where it stood in 2001. In this area, the U.S. economy has not performed any better than the French economy over the past eleven years!
- The housing market is unquestionably picking up, and all the evidence points to further improvement down the road. But the key drivers of demand have taken quite a bruising from the weaker economic environment of the past few years, and real estate has lost a good deal of its power to tow the rest of the economy in its wake.
- Corporate profits in the U.S. are at a historic high. However, decelerating productivity growth has led to a significant slowdown in the rise of earnings over the last several quarters. The upshot is that by any standard, developments on the investment front have been extremely disappointing.
- Lastly, while American pragmatism can be expected to bring about a postponement of the deadline for balancing the budget, thereby limiting the “fiscal cliff” risk to the economy, the fact remains that the country’s public finances are in alarming shape. The upcoming negotiations will necessarily turn the spotlight on one of the most disturbing issues facing the United States.