US non-farm pay­rolls buck the Brexit trend

Financial Mirror (Cyprus) - - FRONT PAGE -

On Fri­day, July 8, US non­farm pay­rolls data re­vealed that 287,000 jobs were added for the month of June. This marks a sharp uptick from the May fig­ure of just 11,000 jobs. Re­call that jobs num­bers for May were re­vised sharply lower fol­low­ing the Ver­i­zon Com­mu­ni­ca­tions strike which ‘re­moved’ tens of thou­sands of work­ers from the of­fi­cial data. The con­sen­sus fore­cast for June 2016 was 175,000 new jobs in non­farm pay­rolls, but the ad­di­tional 112,000 jobs de­fied those fore­casts as strong em­ploy­ment prospects were ev­i­dent in mul­ti­ple sec­tors in­clud­ing the fol­low­ing: 58,000 new jobs in so­cial as­sis­tance and health care, 59,000 new jobs in hos­pi­tal­ity and leisure, 44,000 new jobs in in­for­ma­tion (Tele­com), pro­fes­sional busi­ness ser­vices added 38,000 jobs, and re­tail trade in­creased by 30,000. There were some de­clines in non­farm pay­rolls and they came in the min­ing sec­tor with job losses of 6,000 peo­ple. The av­er­age hourly earn­ings for em­ploy­ees across the board in­creased by $0.02 to $25.61. This was pre­ceded by a 6% hike in pay­roll in May 2016.

Ow­ing to these re­sults, Wall Street ral­lied on Fri­day, 8 July, as did the de­mand for gov­ern­ment bonds. The strong gains on Wall Street were sur­pris­ing given the ex­treme volatil­ity as a re­sult of the June 23 Brexit ref­er­en­dum. The S&P 500 in­dex gained 1.53% or 32 points to close at 2,129.90, the Dow Jones In­dus­trial Av­er­age gained 1.40% to close at 18,146.74, and the NAS­DAQ com­pos­ite in­dex gained 1.64% to close at 4,956.76, up 79.95 points. Across the At­lantic in Europe, there were pos­i­tive changes on ma­jor indices. The Ibex 35 in­dex gained 2.22% to close at 8,185.90, the Euro Stoxx 50 PR gained 2.08% to close at 2,838.01, up 57.91 points. The French CAC 40 in­dex gained 1.77% to close at 4,190.68, the FTSE 100 in­dex was up 0.87% at 6,590.64 and the Ger­man DAX in­dex gained 2.24% to close at 9,629.66.

De­mand for US gov­ern­ment bonds moved in lock­step with eq­ui­ties mar­kets on Wall Street. In­vestors have been flock­ing to safe-haven as­sets in the form of bonds, gold, and other fixed-in­ter­est bear­ing se­cu­ri­ties. US gov­ern­ment bonds are roundly re­garded as the pre­ferred in­vest­ment op­tion dur­ing times of high volatil­ity. When the bond price is high, the yields are driven lower. We are now in a pe­riod of ex­tremely low yields on gov­ern­ment bonds, and prices are at pre­mium lev­els. In fact, US gov­ern­ment bonds now yield just 1.366%. The fact that we are see­ing an uptick in eq­ui­ties mar­kets and gov­ern­ment bonds is bizarre. It may even ap­pear to be para­dox­i­cal, but there is a clear rea­son for this. The US econ­omy is prov­ing to be re­silient in the face of grow­ing global eco­nomic un­cer­tainty. As such, US mar­kets are ral­ly­ing. At the same time, we have per­va­sive un­cer­tainty as a re­sult of the Brexit vote. This is driv­ing traders and in­vestors to­wards gov­ern­ment bonds. In Ja­pan for ex­am­ple, gov­ern­ment bonds have be­come so pop­u­lar that the yields are now neg­a­tive. In the US, yields are be­ing driven ever closer to 0% as de­mand in­creases.

US cor­po­rate earn­ings are bang on tar­get, and this is re­flected in share prices which are gen­er­ally grow­ing on Wall Street. We then have a unique set of cir­cum­stances de­vel­op­ing in the form of cen­tral bank poli­cies with neg­a­tive in­ter­est rates be­com­ing com­mon. This is al­ready true across Europe and in Ja­pan. This ef­fec­tively puts a damper on the Fed’s de­sire to raise in­ter­est rates. And with no in­ter­est rate hikes forth­com­ing, stock mar­kets in the US tend to flour­ish. It should be re­mem­bered that in­ter­est-rate hikes are bad news for eq­ui­ties mar­kets be­cause they in­di­cate higher costs of bor­rowed cap­i­tal. This re­sults in lower prof­its for listed com­pa­nies and gen­er­ally get passed on to the con­sumer in the form of higher prices. As such, a grad­ual ap­proach to rate hikes bodes well for Wall Street. Now, in­vestors in the US have ac­cess to rel­a­tively cheap cap­i­tal with­out the threat of ris­ing costs. This acts to spur eco­nomic growth and boost over­all job prospects.

Nowa­days, an es­ti­mated 33% of all gov­ern­ment bonds is­sued have neg­a­tive yields. More im­por­tantly though the cur­rent prospects for the global econ­omy are grim. Most gov­ern­ment bonds sim­ply pay lit­tle or noth­ing, other than act­ing as a store of value. Re­mem­ber that in­fla­tion is gen­er­ally not a hot­bed is­sue dur­ing re­ces­sion­ary times and for this rea­son yields on gov­ern­ment bonds are low. Ow­ing to the fact that gov­ern­ment bonds are of­fer­ing such low yields, stocks in­vari­ably look far more at­trac­tive to in­vestors. Re­call that prices have come down markedly with stocks, bring­ing greater value into the equa­tion as well. It is coun­ter­in­tu­itive that the bond mar­ket is mov­ing in par­al­lel with stocks, given that they typ­i­cally move in op­po­site di­rec­tions. But this short-term trend was given im­pe­tus by the non­farm on Fri­day.

It is not ev­ery day that the yield on the 10-year Trea­sury dips lower on the same day that the S&P 500 in­dex rises. Most of this is due to the ex­treme volatil­ity gen­er­ated by the UK ref­er­en­dum on Thurs­day, June 23, 2016. By the close of day on Fri­day, bond yields for 10-year Trea­suries were 1.366% while the S&P 500 in­dex closed up at 2,129.90. The jobs fig­ures were the best since Oc­to­ber 2015, as per the La­bor De­part­ment. Ac­cord­ing to gov­ern­ment statis­tics, the un­em­ploy­ment rate in the US re­mained steady at 4.9%, slightly higher than the May fig­ure of 4.7%. The un­em­ploy­ment rate is cal­cu­lated from re­spon­dents (US house­holds). In May 2016 the un­em­ploy­ment rate was hov­er­ing around 5%, but since then it has inched closer to­wards the Fed’s tar­geted un­em­ploy­ment rate.




The LFPR (La­bor Force Par­tic­i­pa­tion Rate) inched higher to 62.7%. Wages have also been ris­ing ow­ing to the smaller num­ber of ap­pli­cants look­ing for work. With em­ploy­ers now com­pet­ing with one an­other within the same pool of em­ploy­ees, up­wards pres­sure on wages is tak­ing place. The Fed has been stress­ing the im­por­tance of im­proved US eco­nomic con­di­tions as a pre­req­ui­site for rais­ing in­ter­est rates. Now that jobs growth is so bullish and the per­for­mance of US com­pa­nies is equally pos­i­tive the prospect of rate hikes later in 2016 seems all but as­sured. US eq­ui­ties mar­kets have had a see­saw year in 2016, but they have made strong gains in Q2 2016 and these look set to con­tinue mov­ing for­ward. Sharp losses were in­curred in the run-up to the Brexit ref­er­en­dum, and in the after­math. But US mar­kets have shown their re­silience by eras­ing most of the losses in re­cent weeks. By mid-July, we will start to see Q2 earn­ings re­ports be­ing re­leased. Some of the first big-name com­pa­nies slated to re­lease their earn­ings fig­ures in­clude JPMor­gan Chase & Co and Al­coa Inc.

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