FINANCIAL NEWS HIGHLIGHTS OF THE WEEK
- Political events and communiqués from the new administration, continued to dominate the headlines –
taking some of the attention away from what was a week of upbeat economic data.
- The FOMC held rates steady this week, but remained upbeat about the economy – pointing to continued
improvement in the labor market. This narrative was corroborated by this morning’s employment report,
which blew expectations of 180K out of the water as payrolls rose by 227K.
- In the near term, we expect the Fed to remain on the sidelines in order to observe how the economy behaves
under heightened policy uncertainty. If the economic expansion continues at the current moderate
but above trend pace of growth, we expect the Fed to hike around the mid-year mark. By that point some
of the missing pieces from the policy puzzle should have fallen into place.
UPBEAT ECONOMIC DATA CORROBORATES FED NARRATIVE
Political events and communiqués from the new administration, whether formal or informal, continued to dominate the headlines this week – taking some of the attention away from the upbeat economic data. Equity markets eased off slightly from last week’s all-time high, while long-term treasury yields are expected to end the week roughly unchanged. The euphoric post-election momentum appears to have finally plateaued as both equity and fixed income markets remain range-bound near recent highs.
The lack of policy detail in key areas such as tax reform, infrastructure spending and trade is likely to have featured in the FOMC’s decision to hold the federal funds rate steady this week – a decision that surprised no one. The committee remained upbeat on the outlook, noting that the economy “continued to expand at a moderate pace”, while making reference to solid job gains and an unemployment rate that remains “near its recent low”.
This narrative was corroborated by January’s employment report, which blew expectations of 180K out of the water as payrolls rose by 227K (Chart 1). Gains were fairly widespread in the private services sector, while on the goods-producing side they were concentrated in construction (+36K) – a highly seasonal sector and thus one where we could see some reversal in the months ahead. The unemployment rate ticked up slightly to 4.8%, but for a good reason, as the continued improvement in labor market conditions is drawing in more workers from the sidelines – evidenced by the 0.2 ppts move up in the participation rate on the month to 62.9%. While this development is welcome and largely anticipated, taken together with the deceleration in wage growth to 2.5% y/y from 2.8% in the month prior, it is likely to hearten Fed doves to argue for continued patience.
Earlier in the week, personal income and spending data for December was also positive, providing a solid handoff for consumer spending growth heading into 2017. Incomes rose 0.3% m/m and spending rose 0.5% m/m. Consumer spending drove growth in the fourth quarter and we expect this momentum to carry into the first quarter of 2017. Manufacturing activity remained solid, as the ISM index rose to the quickest pace of expansion in over two years in January. Comments by survey respondents were generally positive with little evidence that recent domestic and global events had taken a toll on demand. On the other hand, services sector activity held steady on the month with the index still at its highest level since September 2016 (Chart 2).
Overall, the US economy continues to exhibit signs of improvement. In the near term, we expect the Fed to remain on the sidelines in order to observe how the economy behaves under heightened policy uncertainty. If the economic expansion continues at the current moderate but above trend pace of growth, we expect the Fed to hike around the midyear mark. By that point some of the missing pieces from the policy puzzle should have fallen into place, such as infrastructure spending plans. Yet, it looks like the highlyanticipated tax reform bill will not be written until summer. That, coupled with the slow nature of the political process in general, has the potential to lead to some pullback in consumer, business, and market sentiment. In the meantime, markets will continue to hang on every word from the new administration.
Admir Kolaj, Economic Analyst
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