Friday, May 4, 2018

Capital Markets: "US Jobs--Not the Driver it Once Was"

From Marc to Market:
The US dollar fell last month in response to the disappointing non-farm payroll report. However, in general, the jobs report is not the market mover that it was in the past. With unemployment is at cyclical lows of 4.1% and poised to fall further. Weekly jobless claims and continuing claims at or near lows in a generation, though over qualification is more difficult than previously.

The monthly net job creation is a volatile number, the underlying churn--people taking new jobs and leaving old jobs--is much larger. The focus in recent months has shifted from the understood to be healthy trend job growth to average hourly earnings. Many officials and economists believe that headline inflation converges to core inflation and core inflation converges to wage growth.

Average hourly earnings are one measure of labor income, and as the market has come to appreciate, it is a particularly slow-moving one. Over the last 12 and 24-months, it has averaged a year-over-year rate of 2.6%. It averaged 2.7% in Q1 18. A 0.2% rise in April is needed to keep the year-over-year pace steady. The FOMC statement recognized that inflation was near its target, but it was anticipating an acceleration. That is the view of wages as well.

Although the Fed recognized the fact that Q1 GDP did not match the pace in Q417, there was no indication that the Fed was not looking past it. Investors learned this week that economy appears not to have enjoyed much momentum at the start of Q2. The manufacturing ISM fell to its lowest level since last July, while non-manufacturing ISM is at the low of the year. The market continues to price in with nearly 100% confidence a June rate, and barring dramatic shock (which neither the weekly jobless claims nor the ADP signaled), it is unlikely to be swayed otherwise by the jobs data.

UK Prime Minister May is in a pickle. We had anticipated a political crisis around the time of the local elections. However, Labour does not appear to have scored the kind of victory that would have encouraged a leadership challenge. The precipitating factor of May's woes, as they mostly have been since taking office is Brexit. Those forces that want to stay in a customs union with the EU have been making a stand in the House of Lords, including this week, adding an amendment to the Withdrawal Bill that rejects a hard border with Ireland. In the House of Commons, a rump of pro-Europe Tories could bolt, denying May of a majority when the bills return to it.

If she was just pressed by the pro-EU forces that would not be much of an issue. What makes it particularly difficult is that what may be acceptable to the House of Commons may not be acceptable to May's senior ministers. Several, including the newly appointed Javid as Home Secretary, reportedly rejected the Prime Minister's compromise plan on the customs union.

The Bank of England meets next week. Today's news that UK auto registrations (proxy for sales) rose in March (10.4%) for the first time since last March is not sufficient to offset the string of disappointing data. The market has completely unwound the rate hike expectations, with the OIS currently implying less than a 10% chance. Sterling made its post-referendum high on April 17 near $1.4375. It reversed lower that and had tumbled about 8.3 cents through yesterday's low just below $1.3540. This roughly 5.9% decline may exaggerate the economic impact. On a trade-weighted basis, sterling fell almost 2.7%. It is near the 100-day moving average as it returned to levels seen in mid-March.

The eurozone disappointments continued to mount this week....