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USA today; More superannuation meddling

Peter Warnes  |  16 Mar 2018Text size  Decrease  Increase  |  
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The U.S. February payrolls report was a cracker for financial markets. Strong job creation was positive for consumption, economic growth and equity markets. Subdued wages growth calmed an anxious bond market. While yields did move higher they were driven by the growth aspects of the report rather than January's inflationary influences.

The 313,000 non-farm jobs created during the month exceeded forecasts of around 220,000 and followed an earlier ADP report showing private sector jobs growth of 235,000. It also suggests government hires contributed. Positively, the participation rate increased from 62.7% to 63% as 806,000 joined the labour force. This kept the unemployment rate steady at 4.1%. The real unemployment rate, which includes those unemployed and under-employed, was also steady at 8.2%.

The labour force of 161.9m comprises 155.2m employed and 6.7m unemployed. Comparatively, when unemployment peaked at 10.2% in October 2009, the labour force stood at 153.8m with 138.4m employed and 15.4m unemployed and a participation rate of 65.1%.

The closely monitored average hourly earnings rose by 2.6%, down from January's initially reported 2.9% (the highest in eight and a half years) and subsequently revised to 2.8%. Recall the January number spooked inflation watchers and led to a 5% fall in U.S. equity markets in early February.

Interestingly, the number of full time workers, those working 35 hours or more per week, has declined from 127.5m in July 2017 to 125.4m in January 2018. The lower growth in average hourly earnings suggests higher growth in part time or lower paid jobs as more joined the labour force looking for work.

The focus will now turn to the 21-22 March meeting of the Federal Open Market Committee (FOMC), the first to be chaired by Jerome Powell. The markets have fully factored-in a 25-point increase in the federal funds rate range from 1.25% -1.50% to 1.50% -1.75%. But investors will be looking at any change in the FOMC members Dot Plot, given the relatively robust economic data since the December meeting. The Dot Plot now seems to have more importance than the convoluted narrative accompanying the FOMC decision.

Some observers cited the moderation in February's average hourly earnings growth as confirmation only three rate increases will be undertaken in 2018. Others went a little further suggesting two. I believe the latter is far too complacent and still lean to the possibility of four. As the labour market continues to tighten, pressure on wages is likely to intensify. It will be the changing perceptions on the speed or otherwise of rate hikes that will have a meaningful influence on the path of equity markets over the remainder of 2018.

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February's CPI came in as expected – headline up 0.2% and 2.2% year-over-year (y/y), with core (excluding food and energy) also up 0.2% and 1.8% y/y. Food was up 1.4% y/y and energy 7.7%. Bond yields and the US$ slipped on the data.

U.S. manufacturing losing its relevance?

Despite the nine-year economic expansion in the U.S. post the GFC, capacity utilisation, which measures utilisation of all facilities located in the U.S., regardless of ownership, in 89 industries - 71 manufacturing, 16 mining and 2 utilities (electricity and gas) – is still below early 2008 levels. It plumbed a record low of 66.7% in June 2009 from just over 80% in early 2008 and currently sits at 77.5%. The all-time high is 89.4% in January 1967.

One would expect the rate will increase following the introduction of tariffs on imported steel and aluminium. Rising capacity utilisation should become apparent following President Trump's comment, "A lot of steel mills are opening up because of what I did."

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Peter Warnes is Morningstar's head of equities research. Any Morningstar ratings/recommendations contained in this report are based on the full research report available from Morningstar.

 

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written content of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

is Morningstar's head of equities research.

© 2021 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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