Moderate employment growth will dissuade the Federal Reserve from acting too quickly to raise interest rates. Photo: Reuters/Lucy Nicholson
Photo: Reuters / Lucy Nicholson

Stock and bond prices rose modestly in response to the just-released US November payroll numbers, which showed weaker-than-expected earnings growth and moderate gains in employment. For asset markets, this is a Goldilocks number. Average hourly earnings fell by -0.1% month-on-month vs an expected 0.2% gain, and year-on-year change in hourly earnings was 2.5% vs a consensus 2.8% gain.

Private payrolls increased by just 152,000 vs a consensus expectation of 175,000; October payrolls were revised down slightly.

This outcome reduces risks to equity investors. The Trump election victory prompted a great rotation out of bonds into stocks, as investors expected both higher growth and higher inflation in the US. The risk to the US equity markets is that bond yields will rise fast and far enough to dampen economic activity, and this would happen in the event of sharply higher inflation.

Markets look to two sources for inflation: the first is ordinary cost-push inflation due to higher wages as the US moves to full employment. That is a fuzzy concept with a labor force participation rate of less than 63%; the US may have enormous reserves of prospective employees now on the sidelines, or it may have a permanently lower participation rate.
The second source for inflation would be monetary: the results of years of quantitative easing would create the conditions for a credit boom and ensuing inflation.

Neither of these scenarios seems particularly terrifying at the moment. Moderate wage gains continue simply because the employment growth under the outgoing Obama administration was concentrated overwhelmingly in the lowest end of the jobs spectrum (health care, hospitality, and retail).

The stronger dollar, meanwhile, acts as a break on inflation by reducing import prices.

Moderate employment growth and unexpectedly low wage gains will dissuade the Federal Reserve from acting too quickly to raise interest rates. The result gives the equity market room to benefit from the new Administration’s policies. the promised boost to infrastructure spending has already rallied industrial names led by construction equipment producers like Caterpillar and John Deere. The promise of corporate tax cuts has benefited small-capitalization companies, because they actually pay corporate tax, unlike some of the multinationals who shelter earnings abroad. Banks have benefited from the steeper yield curve (which increase their earnings) and the prospect of regulatory relief under the new administration.