Despite a small (0.46%) dip on Friday, IT stocks put in a strong showing last week, rising 3.32%: IT was only second to energy, where share prices were driven higher (5.16%) by the risk of conflict in the Persian Gulf. Year-to-date, IT has climbed 26.37%, compared with an overall increase in the S&P 500 of 17.70%. Friday’s close for the IT index was marginally (0.62%) below the current all-time high (April 23rd).
It is tempting to view the rally in the S&P 500 as a result of ‘Fed panic’: central bank doves are feverishly trying to extend the global economic cycle, resorting to ever more desperate policy measures (e.g. ECB) to prevent ‘Japanisation’. This would be a wrong conclusion to draw. The low inflation that has allowed the Fed to be more pragmatic has been driven by IT, which has pushed the NAIRU down. As it stands, the NAIRU could still be below the current jobless rate of 3.6%. The Fed can test the envelope. It may be possible to get the unemployment rate down below 3.0%, without driving inflation above target.
Indeed, initial claims dropped 6k last week as well (to 216k) despite a spate of manufacturing surveys showing a further deterioration in sentiment in June (Empire State, Markit). The claims data since the May payroll report would suggest that the sharp hiring slowdown was either a one-off, or that payrolls growth will gradually ease from here due to skill shortages and demographics. However, it should be stressed: skill shortages need not imply the US is close to its NAIRU: disruptive technology (e.g. Libra) can still override traditional indicators of a tight labour market.
