The threat of an overheating US economy has been rising up the list of investor worries. And there was plenty to fuel such concerns in the February jobs report. With 313,000 net new jobs created, last month represented the biggest hiring spree since mid-2016. The labor participation rate, which should be declining as a growing number of aging workers retire, actually rose to 63% from 62.7%.
This raises the prospect of higher inflation and justifies a higher fed funds rate, which remains negative in real terms. But we still believe the risk of overheating is contained and see no need for a sharp acceleration in Federal Reserve tightening.
- Wage growth remains modest. Average hourly earnings growth actually slowed to 2.6% from a downwardly revised 2.8% in January. Even if the figure rebounds this month, as we expect, there are few signs that wage growth is out of control. An alternate measure of pay growth, the Atlanta Fed Wage Growth Tracker, fell from 3.6% in September to 3% in January, the last month for which data is available.
- Inflation is only gradually approaching the Fed’s 2% target. The US core personal consumption expenditure (PCE) price index, the Fed’s preferred measure, rose 1.5% year on year in January, unchanged from December’s level.
So, the speed of Fed tightening still looks unlikely to exceed one rate rise per quarter this year. So we believe the 10-year US Treasury is attractive versus cash. And a gradualist Fed is also positive for global stocks.