The U.S. payrolls were released Friday and as expected it was yet another month where payrolls expanded. And what a relief. The markets grabbed the number with gusto and the equity market rallied, whilst the bond market sulked in its usual taciturn way and sold.
So why is this a dirty secret? After-all, 86 consecutive months is not something to be sneered about. The unemployment rate is now at 4.1%, the lowest in 17 years. This is the third straight quarter of 3% growth and by way of comparison, we have to revisit mid 2004 to 2005 to get a similar read. Global growth is expanding, and Japan has now recorded 16 years of sustained expansion. So, what’s wrong?
Simply put, with all this expansion little investment is being made for the future. Low interest rates have allowed companies to initiate buybacks and increase dividend payouts. Little has been put back into the business and with the looming tax cut to 20% the trend seems likely to continue.
Productivity remains tepid. Company investment is cannibalising what companies are available. Average hourly earnings increased by 5c. To add insult to injury, a number of U.S. companies complained this was excessive. Wages yoy are up 2.5% and this is a trend that has been continuing since 2015.
For Trump, the problem is the split in the work force. Business wants everything cheaper and as such baby boomers are being replaced by low earning millennials and knowledge is being lost. The global economy means that factory workers are competing with workers in Vietnam, India, China and a host of other low labour cost countries. For those workers in the U.S., the promises of Trump can never be realised. In a competitive marketplace, if you don’t have the right suite of skills then that worker is left behind.
This week the Fed will hike rates. For bond investors, the view remains unchanged. Inflation is the key and being stuck around 2% means that the bonds are close to being fully priced at the moment. The expectations of three rate hikes in 2018 appear to be not fully factored in, two certainly, three only a maybe.
For the economy it will be interesting to see what happens as rates edge higher. Previous talk of rising rates saw the housing market slide and as hikes become a reality this may lead to a slowdown in housing and possibly cause a slowdown in the economy. Equities will have to adjust to higher interest rates.
And just when Trump thought he has his tax package bedded down, it now appears as though Senator Susan Collins may not support the final vote. At this stage, Corker and Collins appear to not be supportive of the Bill and that means Mike Pence would have to cast his vote for the Bill to pass. If more than 2 senators fail to support the Bill, then it will fail. So the reconciliation of the Bills just suddenly became a little trickier.
Today you can now trade Bitcoin on the CBOE.
On Friday the pound regained some strength after Brexit talks appear to be heading in a favourable direction.
Equities: The S&P 500 rose 0.55% and the Dow rose 0.49%.
Currencies: The pound rose 0.75%.
Bonds: The 2-year closed at 1.80%. and the U.S. 10-year closed at 2.38% while the 30-year closed at 2.77 %. The 2/10 closed at 57.7, the 2/30 at 96.9 bp and the 10/30 closed at 39 bp. In addition, the European 10-year benchmark closes were, gilts closed at 1.27%, bunds at 0.303% and OAT’s 0.627%.
Commodities: Gold fell 0.38% and WTI rose 1.2% while copper regained 0.47%
Aussie Market Today.
Bonds are likely to trade a little weaker on the day while equities should be stronger as we head into the holiday break. And look for some profit taking and clearing of positions later in the week.
Geopolitical tensions are once again rising albeit slowly at this stage.