Jobs data doesn’t change Yellen sweet spot: James Saft

July 3, 2014

July 3 (Reuters) – Good news on the jobs front is even
better news for investors in risk assets as it does little to
move markets away from the Janet Yellen sweet spot.

U.S. nonfarm payrolls increased by 288,000 last month,
topping the 200,000 level for five straight months for the first
time since the go-go late 1990s. Unemployment fell to 6.1
percent, its lowest since September 2008, the month the collapse
of Lehman Brothers rang the opening bell for the financial
crisis.

The Yellen Sweet Spot, as I like to call it, is the idea
that risk assets should legitimately rally because the Fed is
committed to loose conditions and the economy is not really
doing all that badly.

Today’s numbers, while strong on the job creation front,
featured more of the same tepid wage growth. In fact, wage
growth is running at just 2 percent annually, as compared to
headline inflation of 2.1 percent. Those are not the kind of
figures that will force the Fed’s hand on a rate rise.

Underlying this is Yellen’s thesis that there is a shadow
army of the unemployed who aren’t even looking, but who will
slowly be drawn back into the labor force as conditions improve.
Those would-be job seekers are capping wage growth and mean the
6.1 percent jobless rate looks far better than it actually is.

The upshot is that the Fed is going to be on hold until they
start to see those earnings figures improve, and if Yellen is
right, that could be quite some time.

For risk assets this is good news. The Fed is going to be on
hold and the economy seems to be holding its own, albeit with a
fairly low ceiling for potential growth. For the companies whose
securities make up the risk markets it is going to remain easy
to borrow, often on outrageously loose terms. Climbing out a
little further on the branch in search of a bit more return is
still going to look like the play for many investors.

Similarly if you have a business and can squeeze out a bit
of top-line growth in revenue, you won’t find yourself hurt by
runaway wage growth. As for emerging markets, this is a bit of a
dream report too. Strong enough to not raise red flags over
demand but not so strong that funding conditions can be expected
to tighten soon.

MACROPRUDENTIAL PROMISES

So really the payroll report represents more of the same.
I’d argue that the big news for markets in the past 24 hours is
actually Janet Yellen’s speech at the IMF on Wednesday, in which
she launched a strong attack on the idea of using monetary
policy to pop bubbles.

“I do not presently see a need for monetary policy to
deviate from a primary focus on attaining price stability and
maximum employment, in order to address financial stability
concerns,” the Fed chair said.

The idea instead is that macroprudential policy, essentially
regulation and jawboning financial institutions, can instead and
more effectively be used to tamp down any excesses which might
build up.

And while Yellen did say there was some evidence that
investors are reaching for yield, she in no way gave the
impression that this was profoundly worrying.

Given that regulators failed to use macroprudential policy
effectively at important junctures during the past two decades,
this policy stance is worrying over the long term but should be
encouraging for those seeking to put money at risk.

So, what could change all of this?

Investment banks are already moving forward their estimates
of when the Fed will tighten, but don’t expect the rhetoric
coming out of the Fed to follow suit until we have some stronger
evidence that job creation is actually producing above-inflation
wage growth.

So there you have it: a Fed concentrating on maximum
employment, satisfied with price stability and not minded to
suppress risk taking, all operating within the context of a
sluggish but still slowly growing economy. It is a recipe for a
continued rally.
(At the time of publication James Saft did not own any direct
investments in securities mentioned in this article. He may be
an owner indirectly as an investor in a fund. You can email him
at jamessaft@jamessaft.com and find more columns at blogs.reuters.com/james-saft)

(Editing by James Dalgleish)

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