Friday’s dip in the y/y for average hourly earnings to 2.5% and the strong payrolls, combined with the promise to “cut a lot out of Dodd-Frank”, are all bullish for equities. The longer-term target for the S&P 500 (3,000, mid-2018) remains intact. There are some obvious geopolitical risks. North Korea’s nuclear ambitions are a potential flash point and partly explain Mr Abe’s eagerness to appease Mr Trump on jobs and trade. The political stability of China may also be called into question at some juncture: the abduction of billionaire Xiao Jianhua in Hong Kong marks a worrying escalation in China’s slide into a reactionary regime that may accelerate capital outflows.
However, from a domestic stand-point, the economic data is perfectly aligned for a strong rise in US equities. Core inflation remains under control as growth accelerates. The survey data has been encouraging. US companies are not worried about Mr Trump’s more assertive, even confrontational, administration. Instead, they are focussing on the President’s bold agenda for reform. The planned deregulation of the financial sector carries obvious secular risks, but it will provide a cyclical boost to the economy. The details of the latest payroll report suggest the promise of far-reaching change is already having an impact on hiring in the financial sector.
Treasuries will remain under pressure. The bond market is still repricing the end of secular stagnation. The wage data may be sluggish, but that in part reflects the rapid changes in the economy and tech disruption. There were also distortions to last month’s data, which may unwind next month. Workers in continuous employment with the right skills are in high demand. Nevertheless, the potential upheaval from technology also explains the behaviour of the Treasury curve, with 30-years outperforming. The secular trend towards disinflation may reassert itself in the long term.
Summary
- Sharp increase in financial sector jobs underlines impact of deregulation
- Hourly earnings will rebound next month
- Hiring will accelerate too
