Analysed by Pedro del Pozo
US employment figures have become the key benchmark for the markets. The latest figures reveal that it has not been a good result, but precisely because it is not it may be well received by investors. Job creation has come in well below expectations and, furthermore, the previous figure has been revised downwards. This may help to ease one of the main sources of tension in recent weeks: the possibility that the Federal Reserve might have to implement interest rate rises that are more aggressive than expected.
Until now, the market had been influenced by several factors. On the one hand, geopolitical factors appear to be exerting slightly less pressure, which has had a positive effect on assets, particularly fixed income, in recent days. On the other hand, Thursday’s trading session was made more challenging by news from Japan, where a very poor auction pushed up long-term rates and led to a more turbulent start to the day in the bond markets. This has partially interrupted the positive trend that fixed income had been showing in recent weeks.
Against this backdrop, the US employment figures provide a source of relief. Whilst the market had been concerned about the possibility of further rate rises, weaker employment figures and downward revisions to previous reports ease that pressure. Following an initial speech by Kevin Warsh that was rather hawkish on interest rates – though interesting for his defence of the Federal Reserve’s independence – we may now be entering a phase in which a greater call for calm is being made.
The key point is that the balance of concerns may begin to shift. In recent weeks, the focus had been on inflation and the need to control it. However, in the wake of recent geopolitical developments, the possibility of a definitive end to the crisis in Iran and the fall in oil prices, inflationary pressures are losing some of their momentum. With employment figures such as these, growth may begin to take centre stage in market analysis.
At the Federal Reserve, Kevin Warsh’s first steps appear reassuring. Firstly, he has demonstrated independence from the White House. It seems clear that he will not be Trump’s man at the Fed, but rather someone with a very high level of technical expertise. Furthermore, what we are seeing in Sintra points to good coordination with the other central banks, which means we should not expect too much divergence between the decisions that may be taken on either side of the Atlantic.
Equities, meanwhile, are continuing a very strong run. They are performing exceptionally well and appear to be moving somewhat independently of other asset classes. The employment figures may reinforce this view if the market interprets them as reducing the likelihood of further monetary tightening. In other words, poor macroeconomic data could turn out to be good news for the markets if it helps to rule out the prospect of higher interest rates.
The dollar is also reflecting this interpretation. The employment figures have somewhat eroded the greenback’s recent strength. In today’s session, lower expectations regarding interest rates – stemming from a weaker-than-expected labour market report – are slightly altering the trend of recent days. Even so, the dollar had been showing strength for several days, even weeks.
There are two ways of interpreting the dollar’s recent strength. On the one hand, it has eased resentment towards the United States and reflected an improvement in confidence in the country, likely driven by the ceasefire in Iran. On the other hand, it also reflects Kevin Walsh’s increased prominence and the perception that the Federal Reserve is led by someone who knows how to steer the ship.
The dollar remains at levels of approximately 1.13–1.14 against the euro. This represents a significant appreciation in recent days, but it remains within a range that does not appear to be undermining confidence. In principle, this can be seen as a positive sign: in a somewhat more normalised world, a country that is growing faster and has higher interest rates should also have a stronger currency.
Overall, the employment figures are shifting the debate partly from inflation towards growth. Whilst the fear until now was that inflationary pressures would force the Fed to tighten its monetary policy further, a weaker labour market reduces that threat. As is often the case in economics, just as one problem begins to be resolved, another emerges: less pressure on interest rates, but greater focus on the growth cycle.
