U.S. wage growth re-emerges, the market reacts; the Fed sticks to the script; Europe’s painful good news on growth.
U.S. jobs: Nature of the beat Friday’s jobs report for January 2018 beat expectations in some respects. But it was one specific number that captured the attention of markets – mostly because it answered a key question in the inflation narrative: When will wages rise enough to drive growth forward and spur widely-desired inflation? The day’s answer: January 2018. Average hourly earnings rose 2.9% since the previous January, the highest growth rate since the Great Recession and notably above both expectations and the previous month’s upwardly-revised 2.7% rate.
Market reactions were swift. The U.S. Treasury yield curve reversed some of its recent flattening, implying that the odds of a recession could be fading, at least for the day. The ten-year Treasury blew through 2.8%,1 for part of the day; the 30-year briefly moved through 3.09% before pulling back slightly to 3.06%.
U.S. stocks reacted strongly as well. Rather than taking the report as a sign of improvement in growth prospects, equities headed downward, as if taking to heart a potential rise in labor costs and pressure on profits. The S&P 500 fell about 1% intra-day, the Down Jones Industrial Average fell over 1.4%. Stocks were still ahead year to date, but by not as much as on Thursday; as of mid-day Friday, the S&P500 was up some 4.5% and the Dow was up 4.4% for the year.
The Fed: Nice finish Janet Yellen’s last FOMC meeting as Chair was unremarkable – which itself was a testament to her success in setting expectations clearly. The Fed Funds target rate remained at 1.50%; the decision to leave it at that level was unanimous. The most notable change in the statement was a shift in inflation expectations; instead of expecting rates to stay below 2% “in the near term”, the language read “expected to move up this year”.
Europe: Growing pains The 19-member eurozone grew 2.5% in calendar 2017, according to official figures. That’s the fastest full-year pace since the 3.4% rate of 2007, the year before the Global Financial Crisis.
That growth has been far from trouble-free. Within the larger 28-member European Union, the rate was uneven. The UK turned in a disappointing 1.5% growth rate for the year. And despite the rapid growth, euro-area inflation actually fell to 1.3% in January vs. December’s 1.4%.
Another growth-related challenge within the eurozone: industrial capacity. Germany grew at a 2.2% rate in 2017, the highest rate since 2011; consumer confidence is at its highest level since 2001 and tax revenue is rising. One notable bit of ancedata: a 100-year-old German manufacturer of wooden shipping pallets, an essential product for this export-driven economy, has an order book so full that it’s turning away new customers at the same time as adding workers.
1 All figures Source: Bloomberg, February 2, 2018, 1:00 PM ET