The US Federal Reserve (the Fed) is likely to raise interest rates in December following a series of strong employment indicators. The latest results were skewed by the effects of Hurricanes Harvey and Irma, but if you remove these factors the numbers look good.
Take for example non-farm payrolls, which declined by 33,000 in September – far worse than the consensus forecast but driven by the hurricanes. If past storms are any guide, employment will rebound markedly over the next few months.
Elsewhere, average hourly earnings rose by 0.5% month-on-month, lifting the annual growth rate to a nine-month high of 2.9%. If you take out the effects of the hurricanes, my estimate is that average hourly earnings increased around 2.8%, which is a good result for the US as stronger labour markets translate into higher wages. Further, the unemployment rate actually fell to a 16-year low of 4.2% last month, from 4.4%.
Signs that wage growth might finally be taking hold were evident last week when the US dollar briefly touched a 10-week high and Treasury prices fell.
Other data that points to an imminent rate rise was the release last week of the US ISM non-manufacturing and manufacturing indices – which were stronger than expected. This is a clear sign that the economy is recovering quickly from any hurricane-related disruption and that the underlying pace of GDP growth remains strong. The reading on these indices is consistent with GDP growth in the US accelerating from 3.1% annualised in the second quarter to over 4% in the third.
Markets respond well
The latest PMI data suggests that GDP growth in Europe also remains strong. Combined with the US, this healthy global growth is buoying global equity markets.
Take for example the MSCI ACWI Index, which tracks the performance of large and mid-cap equities in 23 developed and 24 emerging market countries, which hit a record high on Monday.
The rally in the index has coincided with a rise in Markit’s Global Composite PMI to its highest level since the spring of 2015. This suggests that the strength of global equities has been driven by an improvement in economic fundamentals and increasing expectations for earnings.
The MSCI Emerging Markets Index has risen by more than 20%, whilst the MSCI World Index of developed market equities has risen by around 11% so far this year.
The impact of Catalonia
The Catalonian push for independence from Spain is likely to remain in the press in the coming weeks, having a growing effect on markets. With confidence in the US economy growing, the Catalonia issue could be used as an excuse by the market to sell Euro and buy USD. This comes as the Euro has declined since the Catalina issue arose.
Overall, however, the market is maintaining a pretty muted response. This may change as the issues in Catalonia worsen. That said, it’s unlikely Catalonia will secede from Spain given the huge costs involved for both sides. In our view, a more likely outcome is a compromise that grants Catalonia more autonomy.