Those non-farm payroll numbers should worry all investors

8th June 2016

The US non-farm payroll numbers – loosely comparable to numbers employed in Britain – should be of interest to every investor.

Generally the actions of the Fed are of huge import for those trading day to day though if you dare apply the word to this approach, things have got a little more relaxed recently.

The Fed has a little more wiggle room these days after the relatively muted market reaction to December’s small rise in rates despite it being a watershed after ten years of rate cuts. This is in marked contrast to the 2013 taper tantrum as QE was tapered, which shook up emerging markets and saw billions withdrawn to supposedly safer havens, loosely because many EM institutions and investors had borrowed in dollars. Global investors worried the end of QE risked would make servicing those dollar debts more expensive though opinion divided on whether this was really about EM fundamentals or more about fear.

Anyway, it felt as if Janet Yellen as Fed chief was getting a clearer run back to normality and recovery than her predecessor Ben Bernanke.

After the era of forward guidance, where central bankers arguably were – ahem – almost too forward about their future plans which didn’t then pan out, it looks as if the US central bank was winning back its reputation for gravitas and a steady hand.

But maybe the real economy is going to spoil the party. Most investment institutions have been factoring in a range of scenarios around a gradual increase in US rates with inflation expected to return to historical levels following employment.

Of course, that isn’t actually why the vast majority of investors should be paying attention, unless they are planning to play the emerging differences in rates between the world’s big economies and the subsequent impact on global capital flows – something most leave to their fund managers.

It was interesting to see markets including those in the UK reacting first to bad news – a possibly spluttering economy in the US – and then reacting to the ‘good news’ realisation that it has likely put off rate rises.

Up and down like the grand old Duke of York, but at Mindful Money we have one very profound worry and we think it should worry investors too.

Go back four or five years, and the market found itself discussing decoupling between those very difficult developed markets and the Chinese powerhouse which continued to drive global growth at least to some extent while the rest of the world realised we were not, as feared, witnessing the death of capitalism.

As with most investment narratives – they don’t last forever. Eventually China suffered from lower global demand though of course it also faced the unprecedented challenge of taking a huge export/government investment based market and turning it into a consumer driven one.

That in turn affected energy and commodity demand putting many emerging markets through hell. The recovering US then stepped into the breach supplying some demand – but also some much needed confidence. This is vital given that the Eurozone continues to suffer in the doldrums, India is not a game changer just yet, Japan is throwing everything including the kitchen sink at economic transformation but the story is mixed, and China at the very least need more time to transform itself.

That  brings us to the real worry – the US which the IMF has noted recently has been doing the heavy lifting – may be losing momentum.

That, in turn, is the problem for all of us economically and although the correlation isn’t always correct – because they price for the future – investment markets too.

Those non-farm payroll numbers may be of importance for all types of investor. Let’s hope they aren’t part of a trend.

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