The US announced their employment data last Friday which showed that while unemployment rate fell to 6.1%, non-farm payrolls disappointed. Despite the less than expected payrolls, US stocks rallied and closed higher for a fifth consecutive week as investors speculated that weaker jobs growth will prevent the Federal Reserve from raising rates sooner than expected.
 

Macquarie Equities Research (MER) released an annual report on the same day (5th Sept 2014), analysing the US data. Some excerpts from the report can be found below.
 
More evidence of lower potential and a smaller output gap
 
According to MER, the US employment report provides further evidence of lower potential and a smaller output gap than widely believed. In particular, there is strong evidence that wage growth is on the verge of accelerating and that even a modest level of payrolls growth is enough to reduce slack in the labour market.
 
This underpins several of MER’s key differentiating views: 1) the FOMC is likely to raise the Fed Funds rate in March 2015 (and will soon soften its forward guidance, potentially on 17-September); 2) the yield curve should continue to flatten; and 3) equilibrium short- and long-term interest rates are likely well below that implied by the conventional wisdom.
 
Wage growth showing signs of accelerating
 
An important component of MER’s thesis is for wage growth to show an acceleration and MER’s preferred indicator continues to be average hourly earnings for production and non-supervisory workers, a measure that has a far longer history than alternatives highlighted by consensus. While markets do not typically immediately react to this figure, MER believes it is the best reflection of compensation pressures and costs likely to be passed onto consumers.
 
This measure showed a gain of 0.3% for the month, its highest monthly increase since February when severe weather skewed the number to the upside. What’s more, it now exceeds 2.5% year-on-year (yoy), the highest level since May 2010. MER believes that even this level, however, understates the degree of tightness in the labour market. It continues to be suppressed by weak wage growth in the education and health services (EHS) sector.
 
MER strips out the impact of EHS to develop a measure of “core private sector wage growth” which provides a better sense of private sector compensation pressures. This has increased to 2.8% YoY and has more than doubled from its trough in 2012. In the last economic cycle this level was first reached in July 2005, when the Fed had already been raising short rates for over a year.
 
Even modest job growth is enough to reduce slack
 
Given the disappointing headline and a small decrease in headline unemployment, consensus is unlikely to share MER’s takeaways. MER’s view is driven by analysis which showed that due to an aging population, the unemployment rate can be reduced by jobs growth as low as 55,000–115,000 per month. MER’s viewpoint may soon start to have more of an impact on the policy outlook. A research paper from the Federal Reserve published on 4 September found a similar result, suggesting that much of the decline in participation is structural and that “over the next decade somewhere between 50,000 and 75,000 jobs per month will be needed to maintain an unchanged unemployment rate”.
 
Data to look out for this week
 
Mon 08 Sept: China trade figures; Japan GDP
Wed 10 Sept: Japan producer price index
Thu 11 Sept: China producer price index, consumer price index
Fri 12 Sept: US retail sales, consumer confidence; Euro industrial production, employment; HK producer price index; Japan industrial production

Source: Macquarie Research - 8 Sep 2014