Expect Yellen to chicken out again on any meaningful rate rise for September

Will she or won’t she? It seems with Fed interest rate policy remaining the only game in town, strategists are stuck with trying to second guess Yellen’s next move at the forthcoming FOMC on 16-17 September. Of course we’ve been here before and we can look at all the evidence and data under the sun showing that rates should have gone up years ago and that the current ZIRP regime is counter-productive. Once again, we don’t think Yellen will raise rates, or at least not materially. Not because of the data, because most of that from the upward revision in Q2 US GDP (from +4.4% to +5.9% YoY – at nominal prices) to the fairly steady progress in employment and incomes would be supportive of an increase. Nor do we think because of slowdown scare stories out of China. Official China GDP data has been looking increasingly suspect for years and the blow-off in domestic equity prices was in large part a correction to credit fuelled speculative bubble which the Fed ought to be attempting to unwind itself. No, we don’t think she’ll raise because she doesn’t need to. Barring a brief wobble on one recent bond auction, the Fed doesn’t need to offer higher coupons to get its debt away, at least not yet. With ECB NIRP and a suitable level of political chaos being maintained globally, the US dollar remains well bid as do Treasuries, with yields easier across the maturity range. With sign that manufacturing competitiveness is already under pressure from the stronger dollar, why would Yellen want to compound the pain with an even stronger dollar while also risking snuffing out the credit fuelled consumption that is still keeping the US party going. Like Carney, she’ll talk the talk on rates, but push out the point when these are likely to impact into the year-end or beyond, if currency markets permit.

US private sector jobs +2.5%, average income +1.4% therefore total US private sector income +3.8%

So what of August’s NFP numbers? At +173k MoM overall and +140k for private sector jobs, the numbers were a little less than the >+200k estimates preceding them, although the August holidays can sometimes make the numbers a bit lumpy. On a YoY basis this represented an increase of +2.2% overall and +2.5% for private sector jobs, which after a +1.4% rise in average wages implies an approx. +3.8% YoY overall increase in US private sector gross incomes. Not a particularly rampant performance, but nor was it something out of line with what was being delivered over the previous cycle and certainly not something that would suggest the need for endless Fed life-support.

Average hours -0.5% vs Av hourly wage +1.9%

In terms of the components of this +1.4% YoY average wage increase, this included a +1.9% increase in average hourly wage which was slightly down from the approx. +2.5% being achieved earlier in the year, but a -0.5% contraction in average hours being worked. As reductions in overtime and hours worked can sometimes precede a more general contraction this will no doubt be kept under review by the Fed, although as one can see from the below chart this can also produce a number of false negatives.

Interest sensitive industries of Auto & Construction still hiring

By industry segment, the collapse in commodity prices has had an immediate and heavy impact on the associated ‘mining and logging’ employment segment (including oil) which should come as no surprise. A high US dollar has been slow to impact manufacturing employment, which is only just starting to tail off, while continued credit availability seems to continue to underpin construction and Auto related areas; notwithstanding the increasing erosion in share at the latter from international competitors. With both these areas sensitive to credit availability and rates, we would expect Yellen to be reticent in adversely impacting these.

So what does this mean for Wall Street? - More of the same, albeit perhaps with more emphasis on acquisitions and mergers than just share buybacks. For example, for the 5 year period 2010-15, the US quoted groups under our coverage converted approx. 71% of net income into FCF (vs 89% equivalent for 2002-07) and spent approx. 17% on acquisitions while returning 75% back to shareholders, with the remaining c.8% used to reduce debt.

71% of US FCF returned to shareholders in last 5 years

FCF generation and capital allocation 2002-07

November non-farm payrolls – Bah Humbug!

I can hardly contain myself with excitement. US non-farm payroll data for November is out and the headlines are that the +321k MoM additions (+314k for the more relevant Private sector jobs) “smashes forecasts” (Guardian) and that “The dollar has gone through the roof” (City AM). With another month of unemployment at only 5.8% (try to ignore the participation rate), this should get the President hot-footing it from the golf course to make another speech on how well his policies are working!

So what’s all the excitement about?   Yes, November has broken above the +300k level which nowadays is a pretty rare occurrence and on a MoM basis, the pickup in what should be higher added value areas such as Professional & Business Services, Construction and Goods Producing should auger well for incomes, albeit the evidence for that is unfortunately still rather tenuous with average weekly hours of 34.6hrs up by only +0.3% both MoM and YoY from October’s and last November's 34.5hrs and with average hourly earnings of $24.66 per hour up +0.37% from October's $24.57 and up by +2.1% YoY from last November's $24.15 per hr.



Notwithstanding the brouhaha, the year on year performance remains disappointing given the $80bn pm of QE ‘goosing’ for most of the period. Over 12 months, private sector employment growth of +2.3% has only just exceeded overall population on a percentage basis, but has struggled to match the absolute increase. From the below table, one can also see a mixed profile by industry. Normally high value added areas such as Prof & Bus Serv have done well at +3.7%, but the normal premium end of this in Financial (at +1.4%) and Legal (not disclosed but flat), have been struggling, so it looks like recruitment has probably been at the lower end of the scale. Temporary Help meanwhile leads to pack with an +8.5% YoY increase, with Leisure, retail and Service industries providing the main absolute drivers to YoY growth – more burger flipping and check-out jobs!



Where’s the growth driver?
With around two-thirds of economic growth coming from personal consumption, one has to wonder where this is going to come from. The 99% still look fairly maxed-out on their student loans, mortgages, auto loans etc and with property prices settling back the prospects for equity withdrawals and other forms of debt fuelled spending can’t be that good. Recent oil price falls and lower ‘gas’ (petrol/diesel) prices have been used to talk up consumption stories, although the offsetting inflation from food and health seem to have been borne out in the grim ‘Black Friday’ sales data (down over 10% YoY and not a function of online which seems to be flat).

Bah Humbug!
While it may seem unseasonal, it is worth taking a quick look at the numbers. With the public sector ultimately funded by the private sector, private sector income growth is a crucial component to overall GDP prospects. A +2.3% YoY increase in private sector employment with an average earnings up only a miserable +2.1% pa (annualised, less on a rolling 12 month basis), means total private sector incomes must be up by under +4.8% or by +$0.238 tn to $5.24tn. Against the approx. +4.0%/+$0.683tn increase in overall US GDP to $17.56tn over the same period, private sector income growth only provided 35% of this increase. How much of the remaining growth (of $0.445tn) can be directly attributed to the near $1tn of QE during the period will no doubt be cause for debate, but with sub-inflation income growth, more wars and more deficits a few more disappointing retail announcements and markets will be clamouring for “moar,moar moar”.