I don’t have any links today, so I am going to go right into the daily piece here. Just 10 minutes ago, the US jobs numbers were released. Combined with the British composite PMI data earlier, the numbers present a rosy picture for the two economies. If the data continue like this, central bank governors will find it hard to keep the same level of policy accommodation in place.
Because I am writing all of these upbeat pieces, I have to remind you that there is a difference between policy which benefits cyclical economic evolution and policy that creates space for sustainable secular growth. This post is about the former and I am going to disregard the latter for the purposes of that discussion. Nonetheless, I do want to point out that central bankers on both sides of the Atlantic are talking about financial stability.
Janet Yellen gave an interview with Christine Lagarde at the IMF yesterday in which Yellen said that “I will argue that monetary policy faces significant limitations as a tool to promote financial stability.” Instead, Yellen feels that because a resilient financial system can withstand unexpected developments, identification of bubbles is less critical. And she argues for policies that can build resilience in financial stability through using macroprudential monetary regulation and tools rather than interest rate policy.
The Bank of England has already moved against excess in the housing market via the macroprudential side of things by capping mortgage debt to income levels for future lending. And today, the Bank of England deputy governor, Sir Jon Cunliffe, followed up by warning that household debt is a key risk to the UK recovery. In a speech at the International Festival for Business in Liverpool, Cunliffe said that UK household debt was now 135% of earnings, compared to 110% in 2000 and a 165% peak before the financial crisis. Because this is markedly higher than in some European countries (not Ireland, Denmark and the Netherlands for example), he felt the Bank’s new macroprudential measures were insurance against a major crash.
So, that’s all good. And if you want to get a good take on the policy issues at work here, read the Economist’s Buttonwood column here. They do mention my Tuesday piece about the BIS intervention earlier this week.
On the cyclical front though, it’s all positive. In the US, non-farm payrolls increased 288,000 jobs in June, the most since January 2012. The unemployment rate fell to 6.1%, the lowest since 2008. David Wessel noted that over the past 3 months, job growth has averaged 272,000 per month. Meanwhile Eric Burroughs noted that the private payrolls 3-month average of 225,000 jobs is near the post-crisis highs. The bottom line is that, even though wage growth again came up short, the US economy is creating a decent number of jobs. Unemployment is coming down, jobless claims are at multi-year lows as well. This all adds up to a tremendous amount of support for retail sales and continued recovery in the US. The biggest weakness here, as always, is wage growth. Average hourly earnings are up 2.3% year-on-year. This is not terrible but it is not terrific either.
In the UK, Although the Services PMI fell to 57.7 from 58.6, the Manufacturing and Construction indices increased on the month. The high weighting of Services dragged the Composite PMI down from 59.0 to 58.0 in June. But the employment sub-component recorded a record high of 58.2, up from 55.9 in May. Moreover, the composite PMI rose to an average of 58.7 in the second quarter from 58.2 in Q1. That is a signal of acceleration.Other aspects of the PMI data that are a cause for optimism comes from forward-looking indicators like new orders in manufacturing and new business in services. Manufacturing new orders rose in June at the fastest pace since November 2013 and services firms’ new business rose by the most since December 2013. We saw these numbers go from below 60 to above 60. Annualized growth in Q2 in the UK is likely to be above 4%.
The key in the UK as in the US is wages. This subcomponent of the PMI data remains subdued suggests. As in the US, wages are not accelerating. That means the Bank of England is on hold, just as the Fed is. The talk from Janet Yellen and from Jon Cunliffe suggests any excesses in housing or elsewhere will be dealt with via macroprudential policy. For investors, this should mean continued and increased risk in booming markets like high yield. The data and the policy stances therefore are broadly supportive of continued gains in equities as well.