Bob Baur
The Fed put has a lower strike price
“It was a common belief under former Federal Reserve (Fed) Chair Alan Greenspan that the Fed would rescue the stock market from any serious equity turbulence with easier policy. Today it might still be possible, but the strike price is much lower. In the four months of heightened volatility since January, two issues stand out.
“First, long-term U.S. treasury yields went up, not down. Yields on 10-year treasury bonds were 2.66% at the January high and closed Friday at 3.08%, up 0.42%; the first correction since the financial crisis where yields did not drop.
“This suggests the correction was not caused by the reasons put forward by many headlines, such as fast wage growth in January, trade tensions, or military conflict in North Korea or Iran. Instead, the underlying cause was surely that the economic backdrop had dramatically changed from the ugly economic morass of mid-2007 to mid-2016. World growth is robust, the crises are over, and policy is less accommodative. This means that the super-low interest rates that drove the long U.S. equity rally from March 2009 are now going away. Interest rates are returning to normal, as markets and investors are coming to grips with this realisation.”
The second issue: stock market downdrafts
“The Fed Board of Governors has not showed any concern about the stock market downdrafts since January. In fact, incoming New York Fed President Williams suggested less transparency by questioning the value of forward guidance
“So we’re seeing little concern expressed about market corrections, a rising U.S. dollar, higher long-term bond yields or the consequent fall in emerging market currencies – at the same time as suggestions for less transparency from the Federal Reserve. Reading between the lines suggests that whatever put the Fed may have to rescue the stock market in the future will have a much lower strike price than in the past.”
A dearth of employees
“One of the most under-reported news items of the past few months is just how tight labour markets have become in developed regions: particularly the US, eurozone and Japan. The current synchronised world economic growth (which began in March 2016) is still going strong today, albeit with modest deceleration outside the US. Job markets have tightened almost everywhere and wage growth is surely on the cusp of picking up substantially. In some places, it already is.”
“Japan’s jobless rate is a minuscule 2.5%: the second lowest since June 1993. There are 1.59 job openings for every job applicant. Total employment in Japan surged 480,000 in March alone, and shot up 1.41 million in the first quarter. The number of females with jobs in March soared 4.8% over March 2017, and female participation in the labour force is 71.4%
“Wage gains in Japan are already responding to labour shortages; first-quarter nominal compensation jumped 3.6% annual rate over the fourth quarter, and 3.1% over the prior year – the fastest pace in 21 years. Wage inflation in March was 2.1% over the prior year, versus 1% for all of 2017.
“The number of workers over 65 has risen 7.4% over the past five years. Young people are also being hired, according to Nikkei Asian Review; 98.0% of college graduates have landed jobs at the beginning of the fiscal year in April.
The United States
“Nearly every qualified person who wants a job in the US can find one. The overall jobless rate is 3.9%, the lowest since 2000. The jobless rate for African-Americans and Hispanics in April was 6.0% and 4.8% respectively – both record lows.
“If the U.S. expansion lasts beyond June 2019, which we certainly expect, it will be the longest on record, surpassing the 10 years that followed March 1991. Robust capital spending and healthy confidence will keep job growth solid, pulling more and more people back into the labour force. We expect the jobless rate to fall into the mid 3% range by year-end, and for gains in average hourly earnings to hit 3% by September / October.”
By Dr Bob Baur, Chief Global Economist