US jobs report brings respite from China crisis

US jobs report brings respite from China 'crisis'

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The US labour market continues to show signs of strength. We still expect the Federal Reserve (Fed) to raise rates in March, but will be looking for signs of stability in the Chinese currency as well as continued gains in payrolls.

The world is not ending after all.  After a week dominated by concerns over China, the US jobs report surprised with a stronger than expected 292,000 gain in non-farm payrolls in December, an indication that US business is still in expansion mode. Other details of the report showed the unemployment rate remained unchanged at 5% as the participation rate ticked up slightly with new entrants to the workforce matching the increase in employment, which is a positive sign. The one disappointment in the report came on wages which were flat in December, recording 2.5% year-on-year whilst markets were looking for an acceleration to 2.8%. Combining the job gains with a flat work week shows an increase of 2% annualised in the fourth quarter, which indicates a decent rate of growth for the US economy.


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So where does this leave the outlook for interest rates? This report will swing the pendulum back towards another increase on 16 March, the next but one Federal Open Market Committee (FOMC) meeting. Alongside future employment reports, two factors, one domestic and one external, will be critical.

On the domestic front, we would look for evidence that the manufacturing sector is stabilising. Both the Institute for Supply Management (ISM) and Purchasing Managers’ Index manufacturing data have fallen in the US, indicating sluggish industrial activity. Industry is weak everywhere at the moment as a result of the downturn in global trade, however, a build up of inventory has added to recent problems. Fourth quarter GDP is likely to be soft in the US as a result of inventory liquidation, but as long as consumer spending holds up we should see better activity in the first quarter of 2016.

On the external side, we are back to China. The critical issue here is not China’s stockmarket, but the currency. China’s decision to move the yuan (CNY) lower against the dollar marks a significant shift in global currency relationships and can be seen as a new front in the currency wars. This is impacting stockmarkets worldwide.

Such volatility will be closely watched by the FOMC, with a focus on the CNY which accounts for a significant 23% of the trade-weighted dollar. The latest FOMC minutes released earlier this week indicated that there were concerns about hitting the 2% inflation target. The depreciation of the CNY will have a deflationary impact in this respect with the most direct effect likely to be seen in lower import prices and inflation. The latest drop in oil prices will also delay the return to target for inflation.

We still expect the Fed to raise rates in March, but will be looking for signs of stability in the Chinese currency as well as continued gains in payrolls.


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