While the political news of the Macron win in the French presidential elections captures the headlines today, we cannot overlook Friday’s U.S. unemployment rate falling to 4.4 percent in April from 4.5 percent in March, and better than the expected 4.6 percent, and which was the lowest jobless rate since May 2007.
These data indicate payrolls that are consistent with an economy that does not have the adequate labor supply. The U.S. labor market is pretty clearly operating at full employment. Wages are rising on the measures that matter.
The Atlanta Fed’s 3-month average wage tracker for March indicates a 3.4 percent growth rate.
Now, investors could do well paying attention to the fact that average hourly earnings by itself is not a great indicator of wage growth right now, because the one area where jobs can still be created is in the employment of low skilled labor. The increasing proportion of low skill jobs in the economy, raises income, but lowers average hourly earnings even when everyone in the economy may be earning more.
That said, San Francisco Fed President John Williams gave a prepared speech titled “Preparing for the Next Storm” wherein he said: “You can’t predict precisely when or where the next storm will arrive, or exactly what it will look like. But you can make yourself resilient, so when the time comes, you’re ready and able to limit the damage and recover quickly … Although an inflation targeting framework has served central banks across the globe well in the past, the world has changed in ways that call into question its efficacy going forward. In particular, there is mounting evidence that the natural rate of interest, or r-star, in the United States and elsewhere has fallen to historic lows, which hampers the ability of conventional monetary policy to respond to the next downturn.”
He also said separately that his outlook for three or four rate increases in 2017 hasn’t shifted, as the labor market shows signs of expanding beyond its sustainable rate and the economy is operating above potential.
In simple words, investors shouldn't be surprised if we’d get more than two further rate hikes this year, which would put further stress on the rising interest rate divergence between the Fed and the ECB.
In this context, it could be good to take notice that the IMF and the World Bank in recent reports highlighted the rising risk of, yes, a scarcity of dollars outside the U.S., particularly for and in emerging markets, as the Fed is clearly on its way to unwind the multi-trillion stimulus program it put in place after the great financial crisis and that has resulted in a $4.5 trillion balance sheet.
Once the Fed slows its purchases of Treasuries and other mortgage backed securities, then the “dollars” the Fed has effectively pumped out around the world will start to disappear, and here we’ll have a problem, especially for emerging economies.
We aren’t there yet, but we are on our way…
From my side, and notwithstanding obvious weaknesses, I still believe that the United States is still a safe bet, at least for the foreseeable future, notwithstanding that many have become super-optimistic on Europe now that in France Mr. Macron has won the presidential elections.
I’d like to add here that being president in France does not mean that Mr. Macron will have the capacity to govern France because therefore he will need a solid backing from the French National Assembly for which elections will take place on June 11/18.
So, it will be safe to review the situation after these elections in June.
Trying to keep my two feet on the ground, I’m still wondering if Macron's decisive victory has dealt a fatal blow to the “populist” zeal that has gripped markets year-to-date.
In this context, UBS chairman Axel Weber, speaking in Tokyo at the spring conference of the International Institute for Finance (IIF) has warned bankers that Europe is not “out of the woods” from its political risks even after Macron’s victory.
Political risk in Europe remains “actually quite high, even though we’ve seen the center hold in France.” Besides France “there is still Italy where it is very unclear that the center will hold, and there is still Greece…”
Mr. Weber concluded: “Where you find some bright side … there are (also) some downside risks that are not really priced into the market, but that could derail Europe.”
Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments.
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