Adverse weather provided a convenient excuse for the poor payroll number on Friday, but the sharp drop in the jobless rate unnerved bond investors too. The Fed’s willingness to end bond reinvestments may also have heightened ‘anxiety’ in the Treasury market.
In truth, the labour market is showing signs of stress: tech-related disruption is causing some sectors to shed jobs. Retail was a classic case in point and the most obvious reason for last month’s slowdown in payrolls. Big changes in the US economy, with established business models under constant attack, will affect the labour market.
For this reason, the drop in the jobless rate need not be a major problem for Treasuries. The pace of hiring will rebound next month and a June rate hike is still on the cards. Yields may edge higher. However, the wage data is likely to remain relatively soft compared with the last economic upswing. The NAIRU is far below the Fed’s long-run estimate for the jobless rate.
These same changes in the underlying business model imply profit margins will remain elevated this year and could even rise. This is positive for equities, but the dispersion in performance between sectors and companies may widen.
Summary
- This may not be so negative for Treasuries
- NAIRU likely to be sub-4% too
- Big dispersion between sectors underlines structural changes. That will keep wages low and support equities
