Saturday 17 February 2018

Daily Market Update: Payrolls weaken by more than expected in January but still consistent with ongoing improvement in the US jobs market

A woman bikes down a street in Washington, DC on February 5, 2016. AFP / Andrew Caballero-Reynolds ANDREW CABALLERO-REYNOLDS/AFP/Getty Images
A woman bikes down a street in Washington, DC on February 5, 2016. AFP / Andrew Caballero-Reynolds ANDREW CABALLERO-REYNOLDS/AFP/Getty Images

Simon Barry

Friday’s important jobs report from the US was one of those reports that provided some ammunition for economy bears and bulls alike.

Bears will argue that January headline payrolls growth of 151k was the weakest month for jobs since last September and weaker than the 190k or so which had been expected by market analysts. On this view, Friday’s figures offer evidence of a softening in jobs growth amidst early‐year financial market volatility. The glass‐half‐empty camp will likely also point out that there was a particularly notable slowdown in a key source of heretofore outright strength, private service‐providing sectors where growth eased to 118k from 197k – its most sluggish performance since March of last year.

Our own view leans more towards a glass‐half‐full view of Friday’s figures, for several reasons. Firstly, it is very important to acknowledge the high level of volatility that characterises the monthly payrolls figures with the often‐large swings (in both directions) in the data from one month to the next making a strong argument for looking at the figures on a smoothed basis. In this case, there was always going to be some January payback for the exceptionally strong 262k gain in December.

Many analysts (including policy makers at the Fed) tend to sensibly focus much more on the 3‐month average of payrolls growth rather than on the latest single‐month reading to better gauge the underlying trend. And on this basis, the 3‐month average of payrolls – at 231k – continues to look solid, and indeed in line with the average run‐ rate of payrolls seen over the course of 2015. (The trend in private services jobs – at 182k per month over the past 3 months ‐ also continues to look healthy). Second, several other elements of Friday’s dataset were better than expected. The unemployment rate, for example, was lower than anticipated in falling further in January, and now stands at a fresh cycle low of 4.9% in January from December’s 5%. Also, the jobless rate fell for “good reasons” with the household survey reporting a punchy 409k increase in employment (Note that while the household survey – from which the jobless rate is calculated ‐ is not designed to provide an official measure of employment, it does provide a useful cross‐check against the official payrolls outcome). And measures of hours and earnings were also stronger than expected, amid clearer signs that a firming of wage growth is now finally beginning to take hold.

So overall, we regard the totality of Friday’s news as consistent with further improvement / tightening in the US jobs market. And in that sense, we think it is in keeping with the Fed’s intended gradual rate hiking path. Having said that, we are far from complacent on these fronts and will remain very watchful for indications that the trend in jobs growth could be softening, particularly in the private services sector which up to now has played a very important role in dominating over the weakness in manufacturing and energy. In the meantime, the dollar is not hugely changed following Friday’s news, though it is about a quarter of a percent higher against both the euro (at $1.11175) and sterling (at $1.45).

Looking to the week ahead, the US JOLTS job openings are published for December on Tuesday. Expectations are for a decline from 5.43m to 5.35m. Friday’s payrolls report suggested that the cumulative improvements seen in the labour market are finally resulting in increased upward wage pressure and the JOLTS report will give an indication as to whether demand for labour is beginning to outstrip effective supply (generally a strong driver of additional upward wage pressure). The initial jobless claims figures every Thursday are a timely indicator on the economy in general and more specifically the labour market. The print is expected to remain at around 280k levels in the week to February 5th ‐ not as encouraging as in the later months of 2015, but still quite healthy by historical standards.

Retail sales for January on Friday will provide clues as to whether the improvements in the labour market and oil price declines are translating to increased strength in the key component of US economic growth: consumer spending. Expectations are for control group (the most important measure – it strips out the most volatile elements) sales to expand 0.3% m/m in January following a drop of 0.3% in December. A timelier indicator of consumer behaviour is the University of Michigan consumer sentiment index which publishes preliminary February results on Friday. Expectations are for an increase from 92.0 to 92.5. There will also be some interest in whether the uptick in the long term inflation expectations component of the survey in January to 2.7% will be sustained.

Fourth quarter GDP is published for the Eurozone on Friday. Expectations are for an out turn of 0.3% q/q and 1.5% y/y following 0.3% and 1.6% respectively. However, the composite PMI for the same period was consistent with growth of around 0.4‐0.5% q/q. We doubt though, that in light of Draghi’s quite dovish recent comments and the fact that oil prices are currently well below the ECB’s December forecast for 2016, that a mild to moderate pickup in growth momentum will knock the ECB from their seeming intended path of additional monetary stimulus later this year (potentially as early as March). Industrial production is also announced for December and expectations are for an increase of 0.3% m/m, leaving the annual rate of change at 0.9% y/y.

Industrial production is also released in the UK on Wednesday. Production is expected to have grown 1.0% y/y in December following 0.9% in November.

This week also features speaking engagement by some key central bank officials. ECB Chief Economist Peter Praet gives a speech on Wednesday in Washington. A semi‐annual report to congress by Federal Reserve Chair Yellen will be released on Wednesday, while on Thursday she testifies before the Senate Banking Committee. On Friday, New York Fed Chairman Dudley will give a Q&A at a press conference. Comments from FOMC members appeared to put the dollar on the back foot last week, so this week’s commentary will be watched quite closely, especially the testament from Chair Yellen.

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