Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Chart of the Week: US Employment Growth in Cyclical Sectors
Christopher Dembik
Head of Macroeconomic Research
Summary: This is the new version of "Chart of the Week", including the macro calendar for the week ahead. Your feedback is always welcome.
Due to ongoing uncertainty, US companies have cut CAPEX but not jobs yet. The latest payroll published on last Friday is rather encouraging regarding the state of the US economy.
The headline was a big surprise for most market participants, as the NFP beat consensus at 128k vs 85k expected. The figure is even more impressive considering that the General Motors strike had a very negative impact on employment and subtracted 41k from the figure according to the BLS.
On the top of that, the net 95k upward revision for August and September tends to confirm that the economy is more resilient than most expected.
There is not much market slack as the number of “people not in the labor force but still wanting a job” is back to pre-crisis level.
Unless a macro accident happens in November, the latest NFP report supports the view that the Fed could pause in December, after three consecutive cuts.
However, it is not all good as there are still some signs of weakness, especially in more cyclical sectors (chart below):
- Employment growth in construction is standing at 1.4% YoY, which is close to its lowest level since 2012;
- Employment growth in temporary help services is in contraction, at minus 0.1%, the weakest since the end of 2016.
It is too early to talk about risk of contagion to other sectors and our view is still that the US labor market remains well-oriented in the short and medium term, despite the impact of the trade war and China’s slowdown.
Week ahead
Nov. 5: RBA to hold rates at 0.75%.
Nov. 6: Macron-Xi formal meeting. One of the main goals of Macron’s trip is to increase French agricultural exports to China. In other news, the Bank of Thailand may cut rates by 25bps to 1.25% as the THB real effective exchange rate is way too strong.
Nov. 7 to Nov. 20: Privatization of France’s national lottery games (FDJ, for Française des Jeux). It is part of the so called Pacte law aimed to privatize some key French entities and increase business growth and transformation of companies to face international competition. The FDJ is a very profitable company: revenue increased by an average of 5% over the past 25 years and, last year, it distributed 130 million euros in dividends. The French government’s purpose is to reduce its stake in the company from 72% to around 20%. It is considered by investors as the privatization of the year for the French stock market.
Nov. 11: General election in Spain. The most recent polls indicate there is no clear coalition emerging. The PSOE is still leading the polls, but support in its favor is slightly declining to levels close to April election, whereas the PP is gaining more support. Podemos is stable. As of now, the only viable coalition would be a grand coalition gathering the PSOE and the PP, which would be a first in Spain’s history.
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