Today’s US jobs report for June has seen the US economy add back another 850,000 jobs, ahead of this weekend's 4 July holiday.
While the number is a decent improvement on the May non-farm payrolls number of 583,000, it still doesn’t tell us too much about the overall state of the US labour market in terms of how quickly those US workers who have dropped out of the workforce since February last year are likely to come back.
What was particularly disappointing was that the unemployment rate edged higher to 5.9%, against an expectation of a fall to 5.6%, while the participation rate remained unchanged at 61.6%. This appears to be more of a concern for some on the central bank's FOMC than the big rise in prices that we are currently seeing in some of the latest economic data. As a consequence of that, today’s headline numbers are of a lesser importance than what’s happening with the participation rate. It is this number that investors really need to be focusing on rather than wages or the unemployment rate, given recent comments from New York Fed president John Williams.
In February last year, the participation rate was at 63.4% and while it has recovered from lows of 60.2% in April last year, it hasn’t as yet managed to move above 61.7%, even with vacancies which are expected to rise to over 9.3m jobs in next week’s Jolt’s report. Average hourly earnings rose to 3.6% from 1.9%, however that is likely to be of lesser importance due to the fact that some of the jobs added back are likely to be higher-paid roles.
In essence this is a goldilocks report: good for stock markets, but also net-net good for the US dollar, and means the Fed are set to remain on autopilot until Q4, whatever inflation does. That being said this, week’s move higher in the US dollar still speaks to the prospect, that whatever your view on inflation, the Federal Reserve of all G7 central banks will still be the first to pull the trigger on a scaling back of asset purchases, followed by the likelihood of a rate rise, and today’s payrolls report does nothing to change that.
This week we’ve seen further evidence of rising inflationary pressure, with the latest US ISM prices paid component of the June manufacturing report coming in at 92, a 42-year high. This is likely to further the divisions on the FOMC, who are concerned about more persistent inflation and want to start a taper, and those who consider it transitory.
For now, markets are buying the transitory narrative, and it’s not hard to understand why given the base effects of last year, however one has to question how much longer they will continue to do so, if this trend of rising prices carries on into the autumn, particularly given that shipping and freight rates are soaring, which means the cost of trade is likely to filter down into consumer prices, unless these rates start to come down as the supply chain disruptions slowly start to ease.
Elsewhere the complacency about inflation is even higher, with Bank of England governor Andrew Bailey this week saying that it is important not to overreact to an inflation spike that is likely to be temporary in nature. This view has seen the pound slip back today over concerns that the Bank maybe asleep at the wheel. While the transitory view is a perfectly reasonable position to hold, with the departure of Andy Haldane as chief economist, there appears to be no one on the MPC who appears to want to go against this prevailing narrative in what appears to be a classic case of groupthink.
The apparent complacency also comes across as completely reckless from a central bank that over the years has proved to be unable to get anywhere close to meeting its mandate since the financial crisis in 2008. At least Fed policymakers are having open discussions over the possibility that inflation might be more persistent than is currently being viewed. The Bank of England appears to have its fingers in its ears, and by weakening the pound with dovish comments the governor only serves to exacerbate the pass-through effects of any future price pressures.
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