US employment growth

(07.03.2011) A week which included several interesting macro events ended with a US payrolls report broadly in line with the expectations beforehand. This week kick-started with rumours of Moody’s downgrading Greece’s sovereign debt.

By Anders Grøn Kjelsrud, Analyst at DNB Markets

ilustration - chartUS non-farm payrolls rose by 192.000 in February, versus expected 185.000 (Reuters). The figures for December and January were, however, both revised upwards, with 31.000 and 27.000 respectively. Nevertheless, yields on US Treasuries fell throughout the afternoon Friday. The yield on the 10-year note fell roughly 10 basis points during the day, to yield around 3.5 per cent. The rate decrease is probably related to safe-haven flows after geopolitical uncertainty and higher oil prices as result of the turmoil on Libya.

In FX, the US dollar remained fairly stable versus the euro Friday. Hence, EURUSD is still traded right below 1.40, roughly the same as Friday morning.

The heavy snowfalls in January are still making it a bit difficult to interpret the employment figures. Some of the gain now is likely to be caused by a rebound from the weak January figures, which were depressed by the weather. According to the separate Household survey, the unemployment rate fell further in February, from 9.0 per cent to 8.9 per cent. This survey indicates a somewhat stronger stand in the labour market than the non-farm payrolls figures. This may be more in line with other indicators, which more clearly suggest that the economic recovery finally is making improvements also in the labour market.

It has taken time. After six consequent quarters of growth, we have yet to observe an employment growth strong enough to bring unemployment significantly down. So despite recent signs of improvements, the number of unemployed is still at a historically high level. Therefore, in our opinion there is little that indicates that the Fed not will continue with QE2 as planned in early November.

On the contrary, the European Central Bank (ECB) seems to be more in a hurry to begin their monetary tightening. At the last week’s policy meeting, Governor Trichet gave clear signals that a rate hike could come sooner, rather than later. Trichet no longer described the interest rate level as “appropriated”, but instead used the phrase “strong vigilance”, which previously has been used to signal that the rates will be raised. On the basis on the policy meeting, we have pencilled in a 25 basis points (bp.) rate hike already at the next meeting in April, and a another one before end-August.

Yet, we do not believe this marks the start of a series of rate hikes. We still think the ECB will be disappointed with the growth momentum during the year. The first rate hike also seems to be approaching for the Bank of England (BoE), although we do not expect any changes at the policy meeting this Thursday. For BoE we have pencilled in a 25 bp. hike in May, and another one by end-September.

Alongside the aforementioned policy meeting in the UK, the macro calendar this week is relatively slim. Some releases are still worth mentioning. Industrial new order figures from Germany will be issued tomorrow, and industrial production figures the next day. The highlights from Norway and Sweden will probably be the CPI-figures for February, which are released on Thursday for both of the two countries.

Elsewhere, there will be published several interesting Chinese macro figures towards the end of the week. The CPI figures will probably attract most attention. At the National People’s Congress this weekend, Premier Wen Jiabao announced that policy makers are aiming at controlling inflation at an average of 4 per cent this year. That could indicate continued monetary tightening – mainly through further increases in the bank’s required reserve ratio, and to a lesser extent through ordinary rate hikes.