May US jobs report has something for everyone
ALTHOUGH the May US employment report came in below expectations of a 180 000 gain for nonfarm payrolls at only 138 000, the fact that both the capital and equity markets rallied after the data was released shows that there was something in the report that satisfied both bond and stock bulls.
This is important for South Africa as the rally in US financial markets means that more money will be seeking a home in emerging markets.
This is one of the factors why the rand remains strong, despite the ratings downgrade in April. This in turn results in lower inflation as a strong rand keeps a lid on fuel prices and helps with low costs of imported goods. That means for instance that the June Gauteng retail petrol price is back to where it was in March.
The US capital market rallied as the May data showed that non-farm payroll growth was not so strong that the US central bank would be forced to raise interest rates dramatically.
The easing in the US unemployment rate to a preglobal financial crisis low of 4.3 percent from 4.4 percent in April gave support to equity markets, as it showed that the US economy was near full employment, which should support consumer spending.
Longer term there are, however, concerns as the US equity market is overvalued based on conventional yardsticks such as price to earnings ratio or price to book ratios, while the tax proposals put forward by President Donald Trump would see a large rise in the US fiscal deficit, which would imply a rise in capital market yields.
If the US equity market corrects, then other risk assets such as emerging market assets could see a sell-off, while if US capital market yields rise, then that makes emerging market yields less attractive.
In terms of the US job figures, the quantity and quality of jobs is deteriorating. When the US economy is expanding, then the revisions to the previous month’s total tends to be upwards. Conversely, if the US economy is slowing, then the prior month sees a downward correction.
The high-paying manufacturing jobs are replaced with low-paying hospitality service jobs. The leading category of job creation in May’s total was 38 000 new jobs in bars and restaurants, which is amongst the lowest-paid job categories.