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Payrolls: It ain’t what it was

  • 01Aug 18
  • James Athey Senior Investment Manager, Aberdeen Standard Investments

There was a time, not so long ago, when the US jobs report was probably the most anticipated data set for global fixed income investors. Not so now.

Of course, this report has always been just one component of the investment decision-making process; no sensible investor would look at it in isolation. But since the onset of the financial crisis, it is hard to think of a single data set that has focussed the minds of so many.

In many ways, the focus on the jobs report was right and proper. After the financial crisis, emergency monetary policy persisted for longer than most people had initially expected, and the US Federal Reserve (Fed) hoped to observe a greater and greater body of evidence that the recovery in the jobs market was entrenched and that prices would show signs of rising.

The jobs report was key to the Fed’s thinking because it contains headline job growth, unemployment and wage data. Add in the monthly price indices of Consumer Price Inflation and Personal Consumption Expenditures and you have a large portion of the data inputs that might herald changes in monetary policy. Accordingly, each of these data points was watched avidly and was subject to endless interpretation and extrapolation.

That’s not quite so true today though. Recently, markets have reacted in a much more muted fashion. The average one-day move in the US 10-year Treasury yield has fallen from 11.6 basis points (bps) in 2015 to 8 bps in 2016, 5.8 bps in 2017 and 5.7 bps this year.

Investors are more confident in the recovery and consequently see less value in trying to endlessly analyse data like the jobs report.

There are two reasons for this. Firstly, the strength of the US recovery means that the data is less susceptible to noise and temporary negative influences from financial markets and other factors. The recovery has also been boosted by fiscal policy, which has really been a missing part of the equation for the past five or six years. The combination of these factors mean that investors are more confident in the recovery and consequently see less value in trying to endlessly analyse data like the jobs report.

Perhaps the biggest factor though is Jay Powell, appointed earlier this year as Fed chair. He has a very focussed message that the Fed tightening is something to cheer, not fear. The simplicity of his message translates as well with Main Street USA as it does with Wall Street. Emerging market woes, financial market gyrations and stormy weather don’t factor in Powell’s reaction function in the same way that they might have done in his predecessor. The man is not for turning, and this mindset makes short term data less critical for investors.