What the US employment data shocker means for markets

(AF) With economists’ expectations for more than a million new jobs created in the United States in April, the outcome on May 7 of 218,000 new jobs and the slight uptick in the unemployment rate to 6.1% were major disappointments.

Investors had estimated that the reopening US economy would create roughly a million new jobs each month for the next few months, resulting in a much lower unemployment rate.

The weak number also challenges the assumption that the US Federal Reserve would start talking about tapering its bond purchases at its June meeting.

So, the economy might not be growing as fast as the survey data indicates.

What caused one of the largest misses in recent history?

Many business surveys had seen record optimism, but they may have overestimated the extent of the recovery. Reopening sectors such as hospitality and restaurants did hire massively in April, but many other service sectors and construction did not expand their labour forces.

Manufacturing was hamstrung by the semi-conductor chip shortage, which hurt automakers the most. Plus, higher commodity prices and other supply disruptions will continue to slow the full extent of the recovery.

The higher unemployment benefits encouraged some workers to stay at home as long as government support remains generous with residual Covid-19 risks.

Implications for US monetary policy

Global markets are highly tuned to the next policy move by central banks. As part of its new monetary policy framework, the US Federal Reserve has increased its emphasis on the employment component of its inflation/ employment dual mandate.

Unlike past cycles, where the Fed would start tightening before the economy reached “full employment,” the Fed prepared to be late to cool inflation through interest rate hikes. Unless the May employment data reverses the April shocker, the Fed will delay its advance signalling of a tapering in its bond-buying operations.

Market should be supported

With inflation rising due to a multitude of effects, the US yield curve will steepen further. The front end will stay low as investors reduce expectations for an earlier policy tightening while longer maturity bonds suffer from higher inflation expectations.

Equity markets will be supported by the more accommodative US monetary policy, but sectors more sensitive to higher longer-maturity yields, such as technology, will struggle. The high valuations in growth sectors remain a headwind.

The US dollar will resume its gradual decline as reduced expectations for policy hikes despite inflation sap the greenback’s attractiveness. Both effects are positive for gold.

Emerging markets, which have underperformed this year, should find some support in this part of the cycle. A patient Fed, a lower US dollar, and strong commodity demand will keep domestic liquidity ample.

# Rajeev De Mello is an experienced bond investor and chief investment officer based in Singapore. He was Chief Investment Officer for Bank of Singapore and was head of fixed income for the Asian operations of various global asset managers. He now runs his own consultancy firm, Deep Learning Investments.