We expected the Federal Open Market Committee (FOMC) would pause its pattern of quarterly rate hikes at some point this year. While we acknowledged it would come sooner rather than later the question of exactly when was answered unequivocally last week with the Committee’s first meeting and Statement of the year. Along with keeping rates on hold, the Committee dropped its forward guidance and ushered in a new word into its policy guidance: patience.
So the Fed is now officially “on hold” but that doesn’t necessarily mean the rate hiking cycle is over. The outlook for monetary policy is now more firmly in the hands of the data and it’s the labour market that carries most weight in the outlook for inflation.
Much data has been disrupted by the government shutdown including fourth quarter GDP and personal income. But with the Bureau of Labor Statistics (BLS) not impacted by the shutdown, January payrolls data was released on Friday, and it was a ripper.
January payrolls growth came in at 304k, nearly twice market expectations. Some pullback in jobs growth was expected following the stellar growth in December. Instead, the pullback came in the form of a 90k downward revision to December, which still left the month with strong growth of 222k. The 12-month trend rate of job growth has been on an upward trajectory since late 2017 and is now at 234k, the highest since mid-2015.
There were a couple of disappointments, but neither will trouble the Fed too much. Wage growth disappointed with a paltry 0.1% rise but the BLS undertakes its annual revisions each January and wage growth was revised up in 2018. So the disappointment in the month was off a higher base.
The other disappointment is that while payrolls growth (from the establishment survey) wasn’t impacted by the Government shutdown, the unemployment rate (from the household survey) was. This blipped up to 4.0% as a result, still at a level reflecting a tight labour market. Nothing to see here, keep moving along.
The labour market experts among you know what’s coming next. With strong employment growth and the unemployment rate rising, the balancing item was another sharp rise in the participation rate. With the participation rate for ‘prime age’ workers now approaching its pre-GFC highs, this tells us the cyclical component of the post-GFC fall in the participation rate is now largely repaired, and there may not be too much more scope for continued entrants into the labour market to meet still-strong labour demand.
Along with the strong ISM manufacturing data released just after the labour market data, these numbers reflect a US economy that is in good shape. It also tells us that while the Fed is now on pause, it’s too early to say the US tightening cycle is over. That said, having only just pushed pause, the FOMC will be in no rush to resume tightening, should it be required. The period around mid-year will be interesting.
Right now, a still solid above-trend growth outlook, jobs growth running at its highest trend rate since 2015 and a patient Fed supports our recent move to overweight global equities following the growth-capitulation fears that inspired the sell off at the end of last year. But at the same time we have a participation rate that might have done its (cyclical) dash which is telling us to remain wary of inflation and bonds, assuming labour demand remains firm. For more on our asset strategy views read the latest issue of Quarterly Strategic Outlook released last week, and watch out for a blog post from Greg Fleming later this week.
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