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Stimulus narrative set to continue

The US non-farm employment report released on 4 June had the potential for posing a bit of a quandary for short-term market direction.

Sunday, June 6, 2021

The US non-farm employment report released on 4 June had the potential for posing a bit of a quandary for short-term market direction. The change in the number of employed people over the previous month advanced by close to 560,000, falling short of the forecasts by 100,000 or so. It might be that after last month’s surprisingly low number, this report saw a timing reversion boost but it was still a modest disappointment nonetheless. Recent business surveys such as the ISM have pointed to tighter labour market conditions in which firms are finding it harder to fill positions and this has the obvious potential to fuel wage growth, in turn fuelling the inflation threat narrative. We saw some of this pressure in evidence in the average hourly earnings number released today which rose 0.5% month on month, faster than most expectations.

The quandary for markets was that too much good news could perversely be bad news. On the back of an economy rapidly getting back to normal, which has to be good news, the markets are focused solely on the Federal Reserve’s tapering talk given their addiction to continuing stimulus. However, this report overall came in below most expectations and allows for the continual stimulus narrative.

On balance we still believe that with the many millions still out of work in the US and an unemployment rate of 5.8%, which is nowhere near back to pre-pandemic levels, a large degree of slack in the economy remains. We will need to see many months of much stronger job gains before the actual tapering begins – so for now it remains a threat still far off on the horizon. Let’s just hope markets (and the Fed) conclude the same.

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Charles Hepworth

Investment Director
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