Nonfarm Payrolls January 2018

200,000 jobs added in January was the headline number out of the Bureau of Labor Statistics this morning. After a disappointing US GDP print this time last week, this labor report represents a somewhat stronger reading on the US economy than was anticipated. To be sure, some of the weakness in last week’s reading on domestic GDP can be attributed to noisy data and today’s labor report helps underscore the underlying strength of the US economic recovery. Importantly, wage growth picked up 2.9% in January year over year even as average hours worked declined month over month. January’s unemployment and labor participation rates were both unchanged relative to December. Particular strength in hiring was seen in both construction and manufacturing- perhaps a function of resilient domestic economic fundamentals, a weaker US dollar, and fiscal stimulus expectations (i.e. infrastructure spending)?

While the BLS report is significant, let’s not forget that we live in an interconnected world. The BOJ (Bank of Japan) increased its appetite for JGB’s (Japanese Government Bonds) overnight. In fact, the bank went so far as to say that it would buy an “unlimited” number of bonds to tamp down rising rates. Yes, long term rates have been ticking up around the world- not just in the US. Continuing west on our nightly trip around the globe, Europe continues to see fundamental improvement and the Washington, DC-based Bureau of Labor Statistics came through with another solid reading on the state of the US job market.

As previously discussed in prior Partner Notes, TWP is bullish equities. However, this is a very conditional commitment. If US growth can continue to outpace tightening financial conditions, we will remain in that camp, but we are beginning to see some significant cracks within rates and currencies around the world. This could prove to be fairly short lived as the US and global economies continue to chug along in concert with tightening labor markets and financial conditions. It is a delicate balance to strike and any misstep could be quite costly, so we are a bit defensive in terms of risk in a tactical sense as we move our rates/ duration outlook to bearish/ negative.               

Market Outlook: Neutral USD, Bearish Rates, Bullish Equities