July 9, 2017 – The US labor market generated 222,000 jobs in June, the second strongest month of 2017. Job gains were broad-based, with healthy hiring in construction, government and leisure and hospitality. The unemployment rate rose a tenth of a percent to 4.4% amid an uptick in the labor force participation rate rising to 62.8% from 62.7%. In addition, payrolls for April and May were revised higher by a combined 47,000. The major weak spot in the report was another flat average hourly earnings growth. Wages improved by only 0.2% in June and 2.5% compared to a year ago, well below what would be expected at this stage of the economic recovery. As recently as December, the figure was 2.9% and in the months before the recession, wage gains consistently topped 3%. Since mid-2009, when the expansion started, hourly earnings have grown on average 2.2% a year, much less than the 3% expansion of the 2000s, the 3.2% expansion of the 1990s or the 3.3% expansion of the 1980s. The lack of a marked acceleration in earnings reinforces a belief that the Fed will maintain its slow and steady approach to tightening policy in the months ahead. June’s employment numbers help confirm what Fed officials have already suspected, namely, that the economy is on solid footing. At the same time, the lack of serious wage pressure, which has helped keep inflation low, allows them to continue their gradual pace of tightening. Most market participants are expecting one more rate hike this year, in December.
US fixed income markets have been taking their cues from Europe. Despite a series of below consensus data releases over the past few weeks, the yield on the 10 Year Treasury note has grinded higher, closing at 2.39% on July 7, a jump of 25 basis points since June 26. Global yields rose further this week. With the Eurozone’s economy continuing to improve, markets have been anticipating the ECB’s decision to begin scaling back its aggressive quantitative easing package. The yield on Germany’s 10-year government bond closed the week at 0.57%, its highest level since January 2016. Yields on Italian, Spanish, and French sovereign debt also rose. The move in European yields has been compared to the so-called “Taper Tantrum” of 2013, when the Fed hinted at the end of its bond-buying program. Thus far, however, the cumulative increase in interest rates is still relatively small compared to the 150 basis point jump in 10 Year US Treasury yields seen during that time.
Opinions expressed within the commentary are general opinions of Chris Lalli and Jae Lim and are not opinions of CapAccel or SF Sentry Securities, Inc. Nothing in this commentary should be viewed as solicitation to buy or sell specific securities or a recommendation to participate in any transactions. Securities offered through SF Sentry Securities, Inc., member FINRA/SIPC.
Sources: Payden & Rygel, TIAA-CREF, Wells Fargo, Bureau of Labor Statistics