Some are sceptical of the ‘true’ underlying strength of the labour market because recent job gains have been concentrated in healthcare & social assistance and government. It is true: excluding these two sectors, payrolls rose by just 57k last month. However, it is not possible to understand the dynamics of this economy if the role played by demographics and fiscal policy is not fully grasped. According to the BLS, jobs in health care and social assistance will grow most rapidly of any sector over the next 10 years, accounting for 45% of all projected job gains from 2022 to 2032. All else equal, this should keep labour markets tighter. Absent a severe recession, any rise in joblessness may be capped, because healthcare is less sensitive to the Fed’s hiking cycle.
The other side of the equation is the fiscal deficit. Low and behold, the deficit is continuing to widen this fiscal year. Adjusted for timing shifts in outlays, the deficit so far in FY24 has totalled $456bn, $56bn more than the shortfall in the same period of last year. The labour market remains strong: amounts withheld from workers’ paychecks rose by $33bn (or +7% y/y). It is the lack of control over spending that may mean Fed rate cuts for 2024 may yet be priced out. Growth has not slowed all that much: aggregate weekly payrolls were up 5.4% y/y in November.
Richard Hughes, head of the OBR, has warned that the gilt market is exposed to ‘fickle’ foreign investors, with no progress on deficit reduction. In this context, the sharp rally in the yen last week is a warning for sovereign bond markets, including for US Treasuries. Japanese corporate profits have surged to a record high as a share of GDP, and rumours swirled that the BoJ is on the verge of exiting its NIRP. For now, the correlation between US Treasuries and the yen is holding, with both rallying. But this correlation may not last in 2024. Japan recorded a record ‘underlying’ current account surplus (ex-mineral fuel) in the twelve months to October. At some point, a large yen repatriation may begin to weigh on US Treasuries.
