Steven Andrew looks across the pond once again in search of market improvement from the latest US employment figures
The lottery of the monthly release of the US employment report is upon us again with the market looking for a continuation of the moderate improvement seen in recent months. For a notoriously volatile series, the monthly change in non-farm payrolls has been curiously well-behaved of late, encouraging a degree of complacency in the markets. This is unlikely to be permanent.
The two main short-term indicators of US economic activity, the ISM survey and the non-farm payroll report, have both disappointed market expectations over the balance of the past quarter. But financial markets have decided largely to ignore the data – either because the degree of disappointment has been relatively small, or else it has been over-ridden by some upbeat comments on the economy and inflation warnings from Alan Greenspan.
Regardless of this, the ISM and NFP data releases are unlikely to have lost their capacity to surprise the markets and solicit a significant reaction. Being an especially difficult number to predict, it has been the tendency of the employment report in the past to come in way outside the range of forecasts from time to time. The past few months’ NFP releases have been comfortably within the range of market forecasts.
Other indicators of labour market activity – from jobless claims to hours worked – are consistent with no big change having been undergone in recent months, i.e. jobs growth is moving along, but at only a moderate pace. So a number close to the current three-month average of 183k would seem like a reasonable guesstimate to us.
Regardless of the March figure, it is worth remembering that employment growth is a lagging indicator of demand and therefore we should already have ample evidence of the likely trend in labour demand over the next few months at least. In that regard, the best lead indicator of economic activity – the manufacturing ISM report – continues to be consistent with a robust but decelerating rate of expansion through the first half of this year.
Key developments this week
The first indication of March UK retail sales came in weaker than market expectations, with the CBI Distributive Trades Survey reporting a decline in the headline sales balance to -9 from +2 in February. After last month’s lacklustre rebound from the New Year slump (to -3 in January from +33 in December), the survey’s failure to revive refutes the notion that the UK consumer has been undergoing something of a revitalisation in recent months. The next piece of information for March will be the BRC retail sales monitor published on 12 April – after the Bank of England’s 7 April MPC meeting. The CBI report, coupled with softer anecdotal evidence from individual retailers blaming softer sales growth on disruption caused by bad weather in March, suggests there is little justification for the MPC to raise rates at the April policy meeting.
Notwithstanding the lack of buoyant data to support an April move, market expectations are, in any event, focused upon the May meeting as providing the most likely opportunity for the Bank to lift rates to 5 per cent. We would agree that this is the point of greatest near-term risk to our forecast that 4.75% constitutes the peak in rates. What is clear from the minutes of the March MPC meeting is that a further interest rate rise hinges upon the behaviour of the consumer. While the Bank of England continues to acknowledge that tight labour market conditions may yet manifest themselves in upward wages pressure, it continues to observe little tangible sign of this coming to fruition. This does mean, however, that any doubt that the UK consumer continues to decelerate will likely be met by a further increase in interest rates. For the time being, that deceleration remains on track.
The General Election is widely expected to be held on the same day as the scheduled MPC policy meeting date (5 May). The Bank of England governor Mervyn King has made it clear that if this is the case then the rate announcement will be delayed until Monday 9 May.
Steven Andrew is an economist at F&C Asset Management plc
