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12 02 2016 | by Victor Xing | Economics

November Payrolls and Governor Powell on risk management

November Payrolls

The November Payrolls was optically strong with headline job growth at 178,000 vs. 180,000 consensus (two month net revision at -2,000), the U3 unemployment rate declined to 4.6% vs. 4.9% expectations, and the U6 figure fell to 9.3% vs. 9.5% prior.  Nevertheless, components of the latest data gave reasons to be cautious:

  • Average hourly earnings came in at -0.12% MoM vs. 0.2% survey (2.45% YoY vs. 2.8% consensus)
  • Labor force participation rate declined to 62.7% vs. 62.8% prior, prime age cohort at 81.4% vs. 81.6% prior

Other subcomponents were largely in-line with expectations:

  • Employment-population ratio unchanged at 59.7%
  • Long-term unemployed as a percentage of total unemployed at 24.8% vs. 25.2% prior

Involuntary part-time workers as a percentage of labor force declined to 3.55% vs. 3.69% prior:


Labor force participation rate declined in both headline and prime-age cohorts:


Average hourly earnings declined following October’s upside surprise:


The downside surprises in wage growth and labor force participation would not delay a likely rate hike at the December FOMC, but they would give investors reasons to pare expectations of a steeper rate path.  The November election outcome also demonstrated considerable public uncertainty amongst working class households as a result of on-going job polarization.  Thus, investors should be cognizant that focusing only on aggregate data would likely miss strong undercurrents that would later prove destabilizing.

In other words, notable public discontent away from coastal regions need to be factored into investors’ macro outlook, and if significant number of individuals consider a $400 emergency expenditure “more challenging to handle,” then investors should be biased to position portfolios more defensively (i.e. in curve steepeners).

Finally, Dallas Fed President Kaplan highlighted that he expects labor force participation rate to decline further:

We’re aging, which means the participation rate – keep coming back to – has declined and is likely to continue to decline if there aren’t any mitigating actions taken. And we can pretty well forecast this. That’s why I’ve said many times the 62.8 [percent] we’re at now is likely to go below 61 over the next 10 years.

Fed’s Risk management considerations

Fed Governor Powell elaborated on Fed’s risk management considerations under the context of monetary policy’s asymmetric efficacy near the zero lower bound:

As long as we are within 150 bps of the zero lower bound, we are doing risk management, no matter what the state of the economy is.  You are not away from the ZLB the week you lift off.  It is always there – to your left, not very far.  Until you are 300 bps, you are thinking: I need to be careful here.

Additionally, Dallas Fed President Kaplan acknowledged rising market expectations of a strong fiscal stimulus following the presidential election, and the fact that market participants do not have the luxury to wait but to price-in likely scenarios.  Nevertheless, he highlighted that monetary policymakers have a different reaction function, and it is important to be patient and let events and policies unfold:

As a central banker, it’s different. As a central banker, I think it’s very important to be patient and let events and policies unfold, and not attempt to prejudge them – not to prejudge them because you know they may unfold in a way that we can’t predict. And so what I’m going to do as a central banker is be patient and wait, and so I’m probably – you’re not going to hear me a lot say, “If this happens, then we do this”; or, “This happens, this will happen, and then we’ll do” – I don’t think that’s a productive thing because we might be debating something that, in fact, never does happen, and it’s also the combination of policies I want to assess.

There are certain policies individually I think would be constructive for GDP growth over the long term. There are certain policies that I think might be negative for GDP growth. And I don’t want to prejudge what they’re going to be or the combination; I want to see them. And then I’ll assess. But I want to be careful.

Combining these policy views and contrast them against market valuation, it is reasonable to conclude that markets have preemptively priced-in not only expansionary fiscal policy, but also tighter financial conditions as a second derivative function.

With financial conditions as the policy transmission mechanism, the element of time would determine the sustainability of dollar strength and flatness of the Treasury curve.  The longer it takes for expansionary fiscal policies to emerge, the more likely for financial conditions to ease as investors pare expectations of near-term policy tightening due to limited risk tolerance amid central bank inaction.

Next article11 15 2016 | by Victor Xing | Central Banks

November FOMC minutes and debates behind guidance change