Market Watch

I continue to highlight the changing top-down environment in global markets.

More and more strategists are acknowledging that while growth remains the core macro thematic, it isn’t as binary as choosing growth over value or cyclical over defence as it has been over the past five years.

Valuations, inflation, the US yield curve and US employment are all either moving higher or have actually hit the top end of ‘investment’ bands. This suggests growth is becoming fully valued.

US employment is back to pre-GFC levels and wage growth is rapidly increasing, which has seen inflation reaching the Federal Reverse’s target of 2 per cent. This has, and is, putting pressure on rates – another future risk to growth.

These macro factors suggest that with growth looking slightly expensive and facing macro headwinds, the discounts in value may present an opportunity to diversify for the medium term.

Allocating across the spectrum, especially since value markets have weathered the recent geopolitical volatility rather well, suggests that asset allocation right now is critical to avoid losing the gains in the previous years. It’s also essential to position into areas that should start to revert to fair value over the forward years.

Strategy is key in the current climate.

The macro data:

One can’t go past Australia’s employment number due on Thursday. The key points to the survey over the past 18 months have been:

• Total employment: has been increasing for 17 consecutive months and counting. The annual growth rate at the February print was 3.5 per cent year-on-year (yoy) the fastest pace of growth since 2015, which is double the rate population growth.
• Full-time (FT) over Part-time (PT): The current medium trend has seen FT job creation expanding at 4 per cent, which is the fastest pace of FT expansion since 2007. 2017 saw the highest level of FT jobs created since 2005. Strong FT growth is a step in the right direction and should finally absorb the slack left in the Australian employment market created in 2011.
• Unemployment: Unemployment has flatlined of late and actually increased in the previous month to 5.6 per cent. The 10-basis point jump can be contributed to the participation rate edging higher to 65.7 per cent.
• Underutilisation: The measure of ‘full’ employment remains high at 13.9 per cent. With employment growth so strong over the past year, those that had fallen out of the employment market are finally returning. This is a long-term positive, however it does mean that there is still plenty of slack in the market that needs to be absorb before meaningful wage growth can take over.
• Hours worked: the annual rate of hours works eased in February to 2.7 per cent yoy, however this a decade high and has been driven by the recent skew to FT jobs.

If the recent business surveys are to be believed conditions remain positive for employment.

Therefore, ongoing employment growth (especially FT jobs) coupled with a smoothing out of the participation rate will gradually erode spare capacity in Australia's labour market and see the slack finally tightening up.