30 April to 7 May: Benefit of the Doubt

On Friday, the US jobs report confirmed unemployment had fallen to 3.9%, a low last reached in December 2000 and before that in January 1970. As a consequence, the probability of a FED interest rate hike in June rose to near enough 100%. Indeed, the market is now pricing an over 40% chance of 4 or more hikes over the full year. However, a more detailed inspection of the labour market numbers reveals the decision to hike rates is not necessarily as obvious as it seems. In April, labour market participation fell back to 62.8%, the middle of the recent range but almost 5 percentage points lower than in 2000. Moreover, average hourly earnings came in below expectations at 2.6%. In short, whilst the FED appear happy to give it “the benefit of the doubt” and assume historical calibrations of the Philips curve (an inverse relationship between unemployment and inflation) will hold, for now the labour market isn’t working like it did in the past. This is to say, low unemployment is not attracting more people into work or forcing higher wages. And this is not just a US phenomenon – in Japan unemployment is at 2.5% and in Germany at 3.4%, but similarly there is no meaningful wage growth in real terms.

Whether it is because of ageing demographics, deflationary and job saving technology or overleverage, the window into the economy provided by employment certainly suggests this time is different for many developed economies.

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