US Economic Update – 09 march 2015
US employment data takes the market by surprise, reinforces likelihood of a H1 rate increase from the Fed
The February rally for US equity markets came to a close last week after investors appeared to take fright as the NASDAQ Composite reached a new milestone of 5,000 for the first time.
This prompted some initial concern over valuations and the question of whether or not markets had become overextended, while another strong performance from the economic data department did the rest, by prompting investors to look once more at their expectations for when US interest rates are likely to rise.
In detail – non farm payrolls came in at 295,000 for February, making a mockery of forecasts (245,000), bringing the three month rolling average to 288,000. This is while the unemployment rate also fell further, to the 5.5% level, indicating that the labour market could be close to what the Fed has previously described as full employment (equilibrium).
On the downside, wage growth disappointed again when average earnings figures came in at just 0.1% on a month on month basis.
This was some way short of the projected 0.2% figure, although the disappointing month on month data disguises the fact that annual wage growth is now back at 2% in the US, a level which is comfortably above the current rate of inflation.
Markets of course took fright at the above figures as pre-existing concerns over valuations became amplified in the wake of the report’s release.
On balance, we view the week’s data as likely to have increased the pressure upon the Fed to begin raising rates. This is as it does not take a great deal of imagination to envisage a scenario from here, where full employment in the labour market leads to a sharp rise in unit labour costs and a faster return of inflation toward the 2% target.
Looking ahead the key focus for investors in terms of economic data will be the release of US retail sales numbers on Thursday. After two back to back months of contraction it is possible that, considering the improving outlook for the labour market, retail sales may have rebounded during February.
If this is so then it may offer hope to investors who have recently begun to fret over valuations, particularly in the aftermath of the NASDAQ composite’s move to top the 5,000 level for the first time last week.
The above referenced focus upon valuations comes just a few short months after the Dow Jones broke above the 18,000 level for the first time and a matter of days after the global laggard, the FTSE 100, made its own bid for the freedom when it broke into uncharted territory for the first time in nearly 16 years.
Taking into account today’s debut of the ECB’s QE program in Europe, in addition to the rising potential for an interest rate move from the FOMC during the months ahead, it is not difficult to envisage a world where investors questioning the relative risks and rewards of investing in US equity casts a prevailing air of caution over North American markets.
Dow Jones / 10 Minute Intervals
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