US unemployment takes a dive

America's payroll employment report for June provided a positive surprise for financial markets...

America’s payroll employment report for June provided a positive surprise for financial markets, and underlines the slow but steady return to form of the American economy.

There were robust gains of 288,000 jobs and the US unemployment rate fell to 6.1% which is a near six year low. Bob Cunneen, Senior Economist, AMP Capital Investors, said that as a consequence, the US central bank is likely to continue its strategy of gradually tapering quantitative easing, while the prospects of an earlier than expected interest rate hike is well and truly on the cards.

According to the June van Eyk Investment Outlook Report, at present the markets anticipate the beginning of a rate hiking cycle in mid-2015 at the earliest. Federal Reserve Bank of St Louis President James Bullard, for example, notedi, “If you get 3% growth for the rest of this year, if you get unemployment coming down below 6%, if you continue to have jobs growth at 200,000, if you continue to see inflation moving back up toward target, I think if we get to the fall of the year and all of those things are transpiring as I’m suggesting they will, that will change the conversation about monetary policy, and there will be more sentiment toward an earlier rate hike.”

US retail sales have also expanded at a 10% annualised clip over the past three months after the winter lull. Spending has also been supported by the strong gains in the household balance sheet, according to van Eyk. “Household wealth in the US now stands at US$81.8 trillion, driven by a US$758 billion gain in home values and a US$361billion gain in equity values in the March quarter.

Five years ago, in the depths of the great recession, household wealth stood at US$55.6 trillion. Given the run of good news stories, all eyes will be on American corporations, which started their June quarter earnings season next week. “Corporate earnings are expected to rise by a solid 6% for the past year according to Reuters,” says AMP’s Cunneen. “Given that US shares are at historic highs, there will be a heightened sensitivity to any earnings surprises or disappointments over the next few weeks.”


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