Who, apart from Fed chairman Ben Bernanke and his wily sidekicks William Dudley and Janet Yellen (and they’ve got budget deficits to monetise), could possibly think that there hasn’t been a substantial improvement in the US employment situation. By now you may have heard that 236,000 jobs were created in February, which means that in three of the last four months jobs growth has been over 200,000 – with the average for the four at 205,000.
That’s quite something and blitzes by a substantial margin, average jobs growth that we saw from the 2003-07 period. More to the point it occurred despite the fact the public sector is still sacking people. The unemployment rate itself fell to 7.7 per cent from 7.9 per cent – a year ago it was 8.3 per cent. These are good gains, and while there are the usual clichés of ‘it won’t last, it’s a false dawn’, solid jobs growth has been with the US for some years. It’s just a pity that 9 million jobs were lost in the wake of the global financial crisis, otherwise the unemployment rate would be much lower. Fair to say that some of, only some of, not all, the reduction in the unemployment rate is due to a falling participation rate. But then that’s the aging workforce for you – people retire. Similarly, with interest rates at a record low, cheap housing and the like, there is much less pressure for households to send both parents into the workforce – so it makes sense to see the participation rate decline. As for discouraged workers themselves, they are only a very small proportion.
Don’t forget also that a large chunk of the unemployment rate is what’s called frictional unemployment. That’s the part of the unemployment rate that you can’t get rid of due to the fact that even in a very healthy and strong economy, people leave jobs – and it takes time to find work, or people may want some time out. Normally, frictional unemployment is a large chunk of the total unemployment rate and that’s the case now. That’s not to say we’re not dealing with higher structural and cyclical unemployment rates, we are, but realistically the US is only dealing with ‘excess’ unemployment of about 1.5 to 2 per cent.
Anyway, global equities pushed higher again after the data – from about 0.6 per cent to 1.2 per cent for the major indices in Europe, while on Wall Street, we’re talking gains of about 0.4 per cent to 0.5 per cent. Commodities were much more mute as usual, but still managed to push a little higher. The big question of course is how long will the rally last? Well, based on the fundamentals quite a long time. There are of course bears – zombie bears by now given the number of times they have been shot and skinned and humiliated – yet they still come running around, incredulous at the rally. They’ll call time as they have incessantly and will possibly point to the barrage of Chinese data over weekend. It was softer compared to December and even recent averages, but data this time of year is very difficult to read given that so many businesses close down for lunar new year celebrations – and sensible analysts wouldn’t try to read anything into it.
For what it’s worth, industrial production rose 9.9 per cent from a rise of 10.3 per cent in December, and retail sales were up 12.2 per cent down from 15.2 per cent in December. On the trade front, exports were up over 20 per cent and imports fell 15 per cent. Don’t forget the Chinese government wants slower growth – they want rates around the 7.5 per cent mark which is weaker than the double digit rates we’ve become used to. The reason for that is so they can manage growth better – and accommodate the reckless monetary policies of the US, Britain and Japan. Strong growth with insanely loose monetary policy around the globe is a recipe for social disaster in China – inflation. The problem is that inflation accelerated quite sharply in February – to 3.2 per cent from 2 per cent.
So no I don’t think the fundamentals pose any threat. The big swing factor will be politicians and policy makers – and what they can do to ruin things. They still stand as the single biggest threat to the globe and that hasn’t changed.
So that done – the SPI suggests our market will rise 0.4 per cent today. We don’t have much local economic data today but we do see some key confidence indicators through the week (Tuesday we get NAB’s business survey and Wednesday Westpac’s consumer confidence index). Confidence has improved quite a bit since the RBA stopped cutting rates (which was clearly spooking people) and I suspect we’ll see further gains while they hold. Other than that we get new home loans on Wednesday, and Thursday we see employment data – the market looks for a 10,000 rise with the unemployment rate expected to rise to 5.5 per cent from 5.4 per cent.
There’s quite a lot of data overseas as usual, I won’t cover it all here and don’t have much to say on it at this point – but the big stuff to lookout for is German trade data, eurozone industrial production, US retail sales (Wednesday night), US and eurozone inflation on Friday night, alongside US industrial production.
Have a great week.
Adam Carr is a leading market economist.
Follow @AdamCarrEcon on Twitter.