Please see today’s Daily Investment Bulletin from Brooks Macdonald received just now:
What has happened
Equities retreated yesterday as the Federal Reserve pushed back against market expectations for a rapid pivot from the US central bank.
US Payrolls
Markets are expecting 250,000 new jobs to have been created in the US in the month of September, a slight weakening from the 315,000 recorded in the previous month. The overall unemployment rate is expected to remain sticky at 3.7% although there is a high degree of uncertainty over the participation rate. The participation rate is the total labour force divided by the total working-age population and has remained low since the pandemic, exacerbating the labour supply shortage. In August the participation rate rose by 0.3% suggesting that higher wages were tempting workers back into the market but also perhaps that stockpiled cash from the pandemic was starting to run down, prompting workers to seek employment. How the participation rate evolves will be an important input into inflation numbers as well as the broader economic capacity of the US.
US Federal Reserve
The US employment report today will also be closely watched by the Fed who are looking to assess the tightness in the labour market and how that might impact both economic growth and inflation. Should the report continue to show US labour market strength then markets will conclude that the Fed is very likely to raise interest rates by 75bps at their next meeting. Yesterday saw another round of Fed Speakers, all of whom pushed back against the recent dovish repricing of Fed interest rate expectations. Minneapolis Fed President Kashkari said that ‘until I see some evidence that underlying inflation has solidly peaked and is hopefully headed back down, I’m not ready to declare a pause. I think we’re quite a ways away from a pause.’ This sentiment was backed up by several other Fed members suggesting a consensus at the Federal Reserve.
What does Brooks Macdonald think
In July and August markets began to price in a pivot from the Fed, expecting that economic growth fears would cause the bank to soften its tightening stance. The rally in equities and bonds was sustained for several weeks but ultimately unwound after Fed Chair Powell delivered his hawkish rebuke. Fed officials this time round are keen to act fast to reset market expectations rather than see a new, accommodative narrative start to gain more traction. Whilst this is clearly unwelcome to markets, as evidenced by the fresh risk-off tone, a clear message from the Fed now avoids any short term over-exuberance which may just be reversed in a few weeks’ time.
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Andrew Lloyd DipPFS
07/10/2022