U.S. Employment: Trust The Data

Today’s payroll report, combined with the ISM reports, suggests that the U.S economy is back on track after a weak start to the year.

US Employment - Trust The Data

The labor data and ISM surveys paint a much more upbeat picture than other recent economic releases on the demand side (notably, consumer spending reports). Which is telling the right story? Our bias is that today’s payroll report is a good reflection of the current state of the U.S. economy.

The ISM data is relatively free of revisions, and the BLS payroll data is generally considered to be of higher quality than other official statistics.

At 288 000 monthly payrolls in June, and upward revisions to previous months, the job market is on a decent – albeit not stellar – trajectory. The main positive points in the report are that the employment gains are broad-based across sectors; there were notable gains in “high-quality” jobs such as financial services, and other professional and business services; and the unemployment rate fell on the back of a flat participation rate (i.e. not for structural reasons).

On the latter point, the Fed’s estimate of NAIRU sits at 5.3%. Therefore, with a current unemployment rate of 6.1%, there is still a sizeable gap before the economy hits full employment and sustainable wage inflation takes hold. The Fed is unlikely to feel much pressure to warn of premature rate normalization, but the steady decline in the unemployment rate nonetheless serves as a reminder that the ZIRP era is coming to an end. Stay tuned.

Update On Gold

Gold prices remain trendless.

Update On Gold

Our Commodity strategists expect to maintain an underweight precious metals position within the commodity complex. The above chart shows that the key drivers of gold since 2008 – real interest rates, the dollar and investor risk aversion, proxied by the U.S. equity risk premium – have stabilized. Our view is that these drivers will remain trendless in 2014H2, although an equity correction could cause an intermediate-term shift. However, ETF volumes already have adjusted downward, minimizing any downside for gold (and silver).

What could make us wrong and begin a gold bull market? Ironically, a growth scare rather than an inflation scare is the most likely candidate. It would put pressure on central banks to boost liquidity “at any cost”, just like in 2008-2011. But we view that probability as unlikely.

Bottom Line: Gold will ebb and flow with the dollar against a flat trend.