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Payrolls: It ain’t what it was

Payrolls: It ain’t what it was

  • 07Aug 18
  • James Athey Senior Investment Manager, Aberdeen Standard Investments

There was a time not so long ago when the U.S. jobs report was probably the most anticipated data set for global fixed income investors. Not so now.

Of course, it has always been just one component that investors look at, and no sensible assessment would look at it in isolation. But it is hard to think of a single data set that has focussed the minds of so many since the financial crisis.

In many ways, the focus on the jobs report was right and proper. Emergency monetary policy persisted for longer than most people initially suspected after the financial crisis, and the Fed sought to observe a greater and greater body of evidence that the recovery in the jobs market was entrenched and prices would show signs of rising.

The jobs report was key to the U.S. Federal Reserve’s (Fed) thinking because it contains headline job growth, unemployment and wage data.

The jobs report was key to the U.S. Federal Reserve’s (Fed) thinking because it contains headline job growth, unemployment and wage data. Add in the monthly price indices of CPI and PCE, and you have a large portion of the data inputs that might herald changes in monetary policy. Subsequently, each of these data points was watched avidly and subject to endless interpretation and extrapolation.

That’s not quite so true today though and markets have reacted in a much more muted fashion more recently. The average one day move in the U.S. Ten-year Treasury yield has come down from 11.6 basis points (bps) in 2015 to 8 bps in 2016, 5.8 bps in 2017 and 5.7 bps this year. There are two reasons for this. First, the strength of the U.S. recovery means that the data is less susceptible to noise and temporary negative influences from financial markets and other factors.

The recovery has also been boosted by fiscal policy, which has really been a missing part of the equation for the past five or six years. The combination of these factors mean that investors are more confident in the recovery and consequently see less value in trying to endlessly analyze data like the jobs report.

Perhaps the biggest factor though is Jay Powell. He has a very focused message that the Fed tightening is something to cheer not fear, and the simplicity of his message translates as well to Main Street as to Wall Street. Emerging market woes, financial market gyrations and stormy weather don’t factor in his reaction function in the way that they might have in that of his predecessor. The man is not for turning, and this mindset makes short term data less critical for investors.

Important Information

Fixed income securities are subject to certain risks including, but not limited to: interest rate (changes in interest rates may cause a decline in the market value of an investment), credit (changes in the financial condition of the issuer, borrower, counterparty, or underlying collateral), prepayment (debt issuers may repay or refinance their loans or obligations earlier than anticipated), call (some bonds allow the issuer to call a bond for redemption before it matures), and extension (principal repayments may not occur as quickly as anticipated, causing the expected maturity of a security to increase).

ID: US-020818-69667-1