Low Unemployment Contributes To Financial Markets' Goldilocks Scenario

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by: Shock Exchange
Summary

The June jobs report showed 213,000 new jobs were created, beating estimates.

Wage growth was 2.7%, which will likely not deter the Fed from further rate hikes.

A strong jobs picture and solid corporate earnings could send financial markets higher.

Image source: Financial Times

The general thesis is that President Trump must deliver on jobs in order to energize his republican base. The president must have a solid score sheet in order to help the republicans during mid-term elections. The June jobs report, which showed 213,000 new jobs versus an expected 195,000, could help the cause:

The US economy added more jobs than expected in June, but the unemployment rate snapped back from an 18-year low, according to the latest employment data.

The numbers still paint a fairly robust picture of the domestic labour market, with revisions showing even stronger jobs gains in May and wage growth also holding steady and around its quickest pace this year.

The US economy added 213,000 jobs last month, which was down from an upwardly revised 244,000 (previously 223,000) in May, according to the Bureau of Labor Statistics. However the figure was above the median forecast among economists of 195,000 from a Thomson Reuters survey.

The jobs number was down from the 244,00 added in May. Manufacturing, healthcare and construction were particularly strong, while retail pulled back. Manufacturing added 36,000 jobs during the month, and were much stronger than the 19,000 created in May. This could play well for the republicans since manufacturing jobs tend to pay higher wages; it potentially buttresses the president's campaign promise to spur our manufacturing base.

Healthcare and social assistance jobs were up about 35,000, consistent with jobs growth over the past two months. Construction jobs grew by 13,000 as the construction boom has been buoyed by low interest rates over the past decade. Retail jobs declined over 21,000, offsetting some of the gains (+25,000) in May. Retail jobs were particularly strong during the first quarter of 2018 due to positive impacts of the holiday shopping season. However, it could be tough sledding going forward for the retail space.

Unemployment 4.0 Percent

The unemployment rate during the month was 4.0 percent, up from 3.8 percent in May and down from 4.5 percent in the year earlier period. Despite the uptick month-over-month the unemployment rate is still extremely low; a rate of 5.0 percent or less is considered full employment and is extremely bullish for the economy. Prior to the past 12 months the U.S. had not seen unemployment rates this low since late 2000. This connotes a white hot economy and the president is already trumpeting his performance:

How much of the employment picture is due to the president's own performance remains in question. Nonetheless, a buoyant stock market and low employment rate could potentially drown out critics of his recent tax cut.

One would expect a tight labor market to lead to higher wages. Average hourly wages were $26.98, up 2.7 percent Y/Y. It fell short of the 2.8 percent forecast, but was likely robust enough to keep the Federal Reserve on course for more rate hikes. Wage growth was a point of contention during the final stages of Janet Yellen's tenure as head of the Federal Reserve. Investors thought it would trigger additional rate hikes and drive down financial markets. Multiple rate hikes appear to be a foregone conclusion this year, yet the Goldilocks scenario for financial markets appears to still be in play. The Dow Jones Industrial Average (DIA) is over 25,000 and a strong earnings season could send financial markets even higher.

The president and the populace appear to have equated a strong stock market to a strong economy. The odd part is that despite expected Fed rate hikes, ten year treasuries still yield below 3.0 percent. With yields this low the stock market could still be the only game in town for those seeking out-sized investment gains. That could portend additional flows into stocks as long as corporate earnings hold up.

Labor Participation Rate Remains Low

The unemployment rate does not reflect employment age people no longer looking for work. That could partially explain why unemployment is so low. The labor participation rate was 62.9 percent, up from 62.7 percent in May and 62.8 percent in the year earlier period. There are over 95 million people outside the labor force, which one could view as alarming. It still rose Y/Y despite the fact that retiring baby boomers have been pressuring the participation rate. This could be a silver lining for those bullish on the U.S. economy. For now, the low unemployment rate will likely drive the narrative for the rest of 2018.

Conclusion

Ten year treasuries remain below three percent despite the Fed's balance sheet unwind. Low unemployment and a strong jobs report could send financial markets higher. It could be a stock picker's market going forward.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.