Will strong US employment figures give the Harris campaign wings?
The US Department of Labor has caught the bond markets off guard.
In markets, there are days that are simply not supposed to happen. Last Friday was one of those when the US Department of Labor dropped a bomb on an unsuspecting world by reporting a surprisingly large increase in the September nonfarm payroll. For non-Americans who are not acquainted with the nonfarm thingy, it is not the unemployment number that occupies Wall Street but the number of non-agricultural jobs that have been created in the past month.
The consensus forecast had been for an increase in the nonfarm payroll to be 140,000 but the release, always on the first Friday of the month, flashed up on screens a 254,000 followed by an upward revision in the August figure from 142,000 to 159,000. The unemployment rate itself fell from 4.2% to 4.1%. Markets that had by now complacently accepted the recent half point cut in US rates and were cruising to a further cut of the same magnitude in November were caught totally wrong footed and, in bond markets, the reaction was hard and sharp.
So, the economy is not on a glidepath to a soft landing. As I have cautiously suggested in the past, it is on the path to no landing at all. Or at least not for the moment. The members of the Federal Reserve’s monetary policy setting committee, the FOMC, will no doubt have been as shocked as we were. Their stimulative half point easing of three weeks ago had, at the time, caused consternation amongst most economists who had confidently predicted a quarter point cut and were themselves wrongfooted by the larger than expected move lower which had at the time once again raised the question whether they might know something that the rest of us don’t.
Since the turn of the century - it’s hard for old dogs like me to believe that that is going on 25 years ago when it still feels like yesterday – it has become increasingly clear that the Fed and its friends and relations do not have access to better research and otherwise unseen data that the rest of us don’t, but we still quietly like to believe that they do and that their actions are predicated on superior knowledge.
We, the ones who had not expected the 50 basis point cut, suspected a misjudgement. The US economy did not look as though it was in need of supplementary stimulus and, now with the employment data in hand, it looks as though we might have been right and the good folks at the Fed wrong. Shock and awe swept up Wall Street and, by extension, the rest of the world. The US Treasury market responded with a massive leap in yields across the curve with the 10 year note closing at 3.98%, up from 3.82% at the open. But it was the 2-year note that took it on the chin, closing at 3.93%, up from 3.71%. That 22 basis point increase in the yield reflects the markets’ sudden acknowledgement that the 50 basis points cut that was being priced in for November would now be at best no more than 25 basis points. Bonds, the thinking man’s investment vehicle, don’t like to be that far wrong and the response to the strong employment figure was instant and ruthless.
Meanwhile, the spotty nosed equity geeks thought a stronger than expected performance by the economy was something to celebrate and the Dow took off to close up by more than 300 points, in the process making a new all-time high. One day they are off to the ball because the economy is looking weak and rates are set to fall, the next they are on a flyer because the same economy is stronger than expected and despite rates being set to remain high. Put that in your AI-powered model and wait for an explanation. Then, just for fun, ask whether wages growing faster than both the economy and inflation are good or bad news.
Gauging the state and the trajectory of the economy and pricing markets accordingly is at the best of times a game of 4-D chess. Then days come along like Friday when the stats toss a hand grenade into the carp pond and…..
Vice President and Democrat candidate for the White House, Kamala Harris, might feel that the strong employment report will give her campaign wings although just three months ago the same did not work for the British Prime Minister Rishi Sunak. In the same way in which her opponent Donald Trump is endlessly beating the drum that the Biden administration has wrecked the US economy, so here in the UK it was the Labour opposition, led by now Chancellor of the Exchequer Rachel Reeves, that famous ex-Bank of England economist, and the now Deputy Prime Minister Angela Rayner who ceaselessly campaigned with the slogan that the spent Tory administration had “crashed the economy”.
By the time Labour ran away with the election, the UK’s economy was the fastest growing one within the G7, a fact that had next to no impact on the outcome of the July 6 poll. Now, after three months of a near endless moaning and a wailing and a gnashing of teeth, the leading triumvirate of Starmer, Reeves and Rayner has succeeded at scaring the living daylights out of employers and employees alike and sentiment indices that measure investment and hiring intentions as well as those looking at consumer confidence are at worryingly low levels. Might they be in the process of achieving what they accused the last government of having done and which the stats prove apparently not to have been the case?
Under the stewardship of Joe Biden, the US economy has not done badly. That said, as the national debt as a percentage of GDP has since he took office grown from 110% to now stand at 126%, it would be even more troubling if it had not. Over the same period and according to the Fed’s own figures, real GDP measured in constant 2017 dollars has risen from US$ 21.6 trillion in Q1/2021 to US$ 23.2 trillion in Q2/2024. That makes the real growth of the economy 7.4% over three and a half years of Biden. Nominal national debt, however, has gone up by 16%. We might be comparing apples and pears – real and nominal dollars – but either way it is clear that the economy would not have done half as well had it over that period not been fed by an added US$ 1.6 trillion of government deficit spending.
One of my favoured analogies is that of the cliff. The same one looks very different but equally challenging whether one is at the bottom looking up or at the top looking down. Here in the UK, Reeves had tried to make the economy believe that it is doing the former, but by sleight of hand has succeeded in leaving it doing the latter. My fellow writer and executive editor of Reaction, Maggie Pagano, at every turn has pled for the Bank of England to lower interest rates. Her argument is not hard to follow. Lower rates cut the cost of mortgages which puts more cash into consumers’ pockets which encourages businesses to invest which creates jobs which maintains the flow of consumer spending and so on, and so forth. That is of itself not incorrect but fails to account for the problem of money flowing into the economy thanks to monetary stimulus rather than thanks to an increased output of value added or increased productivity to give it its proper name.
Reeves’ £3.1 billion already committed increase in public sector pay, awarded almost entirely without productivity caveats, does precisely that so it is hardly surprising that Governor Bailey and the members of the Monetary Policy Committee are somewhat reticent when it comes to lowering Bank Rate before the impact of these pay increases on consumer demand will have been seen. Reeves is due to present to parliament her first fiscal budget on October 30. As ever, much of what was intended has been leaked – in this case more intentionally than unintentionally – and the initial response from both business and citizenry has been anything other than excitement.
For a shiny new government to have won such a sweeping majority but then to find itself in such low standing after less than 13 weeks in charge must be troubling. My guess is that the Treasury team will already be burning the midnight oil in an attempt to find a way of stemming the rising outflow of confidence and trust and the Starmer/Reeves/Rayner triumvirate must be ruing some of the unbridled enthusiasm with which they had denigrated their predecessors. For all the mistakes which the Tories had made and which in July brought them their worst election result in living memory, it is becoming progressively clearer that trashing the economy was not one of them.
Four weeks tomorrow is election day in the United States and, by all accounts, the outcome of the Presidential race remains unclear. Will Friday’s employment number help Harris as much as Benjamin Netanyahu’s intransigence and Biden’s failure to influence his actions will damage her chances? What is clear is that in the US, as in Europe, traditional left/right or in the American case conservative/liberal lines have become blurred. A deeper dip into the details of the employment report shows a steady decline in manufacturing jobs while there is an increase in employment in what can only be termed low value added employment, much of it taken up by immigrants.
The West which includes North America and Europe with the Antipodes thrown in for good measure is generally not suffering from high unemployment but from a decline in high value added jobs. A street sweeper and a car worker both statistically rank as one employed person although the latter in all likelihood earns three times as much as the former and pays four or more times as much tax. Need I go on?
So equity markets other than that of the UK which is struggling with the new government and the fiscal uncertainties with respect to the content of the October 30 budget on Friday went into overdrive. The Dow put on a further 0.81%, the S&P500 added 0.9% and the Nasdaq 1.22%. The Dax followed suit at 0.55% although early news today that Germany’s manufacturing orders in August were down by 5.8% month over month, far worse than the forecast decline of 1.9% might cause that to reverse. France’s CaC40 was up by 0.85% and China’s CSI 300 on Friday added another 8.48% to its already staggering rally although it is closed today for National Day. It will have already been closed before New York did its thing so, all things being equal, it will tomorrow want to catch up with the reality of American buyers of Chinese consumer goods being in a good place.
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