By: Rhona O'Connell, Head of Market Analysis
The United States Nonfarm Payrolls for July, released last Friday, were a lot stronger than expected, at +943,000 (called at 875,000), with unemployment dropping to a lot lower than expected (5.7%), to 5.4%. Notable gains were in leisure and hospitality, local government education, and business services. The labour force participation rate, a key indicator, was little changed at 61.7% and is just 1.6 percentage points lower than February 2020. The number of people who are jobless but who are looking for work was 6.5M, near unchanged on the month but 1.5M or 30% higher than in Feb 2020.
The August NFPR may not be as bullish given the increase in COVID in parts of the States, but the keywords “substantial further progress” in the FOMC Minutes of a couple of weeks ago are attracting the attention of at least two FOMC members, who are suggesting that progress is being made more quickly than previously expected. This, also, comes from one of our economists: “Despite the delta variant in the equation, emergency level accommodative policies are clearly no longer needed, and all indications suggest the lift off to start with tapering of QE later this year. While this timeline to tapering may be earlier than markets initially expected, it is conveniently aligning with a scheduled reduction in Treasury supply that will help ease any market discomforts. The cumulative effect is helping lift long dated yields once again.”
Ten-year nominal bond yields are currently approaching 1.3%, substantially higher than those in Europe, which are in negative territory, and pointing to further strength in the dollar: euro rate and there are several market participants also looking to gain exposure to the dollar from other currency pairings.
The United States yield curve
Source: Bloomberg
While the headlines may be revolving around a greater proclivity towards tapering, the devil is in the detail and points to more debate. Note also that the longer-term bond market view of the inflation outlook is relatively benign, with the five-year breakeven inflation rate (i.e. the five-year bond yield minus the 5-year TIPS yield) higher than the equivalent for the ten-year tenor, suggesting that the bond markets don’t believe that inflation is going to take hold in a major way.
The U.S. five-year and ten-year yields and breakeven inflation curves
Source: Bloomberg
There is still, in Jay Powell’s latest catchphrase, “a ways to go” before the key parameters are back to pre-pandemic levels, with unemployment at 3.5% and unemployment at 5.7M vs 8.7M currently. Meanwhile a number of companies are still desperate to hire, with many offering signing-on bonuses, while the supplemental cheques are still being released (this programme ends in September).
The Bureau of Labor Statistics notes that recent months’ data suggest that rising demand is putting upward pressure on wages, but that the analysis is complex because of the wide variation on hourly earnings by industry - so not a lot of clarity there. Total private weekly earnings were $1,063 in July vs $1,059 in June and $1,016 in July 2020 (gains of 0.4% and 4.0% respectively). The range during July was from a low of $493.43 per week in the leisure and hospitality sector to a high of $1,918.30 in the private utilities sector.
Productivity levels put a different angle on the employment numbers, at least in terms of the degree of inflationary push.
We have now had the latest productivity numbers; up 2.3% in Q2, with unit labour costs rising just 1.0% Y/Y, a far cry from the headline 4.0% rise in weekly wages. In the manufacturing sector, productivity increased 6.9% and unit labour costs were down a substantial 12.9%.
So given the increase in productivity, from the point of view of the supply-side there is little real incentive to push wage-related costs through the value chain, which alleviates some concerns about potential wage-driven inflation fear. It does not, of course, address the probability of demand-driven inflationary forces when consumer confidence shows resilience, and it is also possible that the increase in productivity is, rather like many others’ view of inflationary forces, transitory. The third quarter productivity numbers will be a key indicator in November.
The Jackson Hole symposium, which will be addressed by Jay Powell, is on 26-28th of this month. The next FOMC meeting, from which there will be economic projections, including the dot plot, the changes in which caused so much movement in the bond and gold markets last Juned, is scheduled for 21-22 September.
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