11th April 2017

Rathbones: Confidence trick

US jobs growth slowed dramatically in March, according to nonfarm payrolls data.

The 98,000 new jobs announced were a far cry from the 180,000 expected, but concerns should be kept in proportion. As we say regularly, this is a highly volatile data-set, prone to significant revisions that never get the headline coverage enjoyed by the punchier but less dependable first estimates. Despite the poor jobs figure, the unemployment rate fell to 4.5% and average hourly wages rose. We’ve seen nonfarm payrolls slump and subsequently rebound several times before. Interestingly, following the disappointing jobs number, the Fed funds futures market became more convinced of a rate hike in June and the likelihood of another later in the year also ticked slightly higher.

At the moment, there is a disconnect in the US between “soft” measures of optimism and confidence and the “hard” data of orders and output. Some people worry about this, expecting hard reality to puncture the “excessive” optimism that has accompanied President Trump’s election. However, Gallup polls show Mr Trump’s ratings are extremely low. Americans aren’t fussed with Trump, but they are optimistic about their economic future. When you get down to brass tacks, the economy is just a grand confidence trick. Misplaced panic can cause a wave of fire-sales or consumer thrift that can drag healthy economies into recession. Infectious confidence by those who perhaps should be a little more cautious can create the demand that hauls ailing markets into periods of strong growth. We think some expectations for growth are a little rich, but we believe the recent buoyant mood should help boost business in America.

We will be able to catch another glimpse of how US companies are doing this week as the latest US earnings season kicks off. Mr Trump has also brought his $1tn infrastructure proposal back on the agenda. Exactly how this would be paid for and how long it would take to filter into the real economy aside, improved infrastructure was one of the major issues for last year’s presidential election. Movement on this could boost the national humour even further.

The UK is in a similar situation. Many people worry about how resilient the economy will be once Brexit negotiations begin. The answer to that will likely be determined by consumption. If consumers remain happy, it will be easier for foreign investors to be unperturbed and businesses can be less cautious. For now, greater-than-expected inflation is the fly in the ointment. For years, policymakers have been worrying about deflation and praying for higher inflation. Now it’s here, fears grow that wages won’t keep pace and consumers’ purchasing power will slump, taking British GDP growth with it. CPI growth, released this week, flattened at 2.3% which is good news. The UK unemployment rate and wage growth will follow soon.

Source: FE Analytics, data sterling total return to 7 April

Damned if you do

As millions of dollars worth of US-made high-explosive rained down on a Syrian airbase, the much-debated Russo-American détente melted away.

President Donald Trump’s response to the Syrian government’s sarin attack at Khan Sheikhoun last week has ratcheted up geopolitical risk exponentially. For the first time since the Cold War, the US and Russia find themselves on opposite sides of an open conflict.

President Bashar Al-Assad’s actions during the war in Syria have been atrocious. This is not the first time he has gassed children. After a chemical weapons attack in 2013, Barack Obama sought congressional approval for airstrikes to curb the Syrian dictator, but was denied. President Donald Trump, once a full-throated isolationist, launched a unilateral missile strike while dining with the Chinese president at his Florida home Mar-a-Lago.

Foreign policy is a minefield. Interfering in the affairs of others usually creates problems that beget more problems: Afghanistan and Iraq are the cautionary tales of our generation. But doing nothing is usually similarly damning. Rwanda and Kosovo were halted by other countries stepping in. What would have happened if they had been allowed to continue?

What makes foreign policy so fiendish is that it’s impossible to know how things may have turned out if things were done differently. The complications spread across the world like a taut web. There is no right path, just varying degrees of less awful.

What’s worrying about Mr Trump’s foreign policy isn’t that he has fired missiles, sent Navy SEALs into battle in faraway deserts or deployed an aircraft carrier near North Korea. It’s that these acts appear reflexive and unilateral. Just how long can Mr Trump’s unorthodox approach continue without causing serious consequences or war?

Bonds

UK 10-Year yield @ 1.08%

US 10-Year yield @ 2.38%

Germany 10-Year yield @ 0.23%

Italy 10-Year yield @ 2.23%

Spain 10-Year yield @ 1.61%

Julian Chillingworth
Chief Investment Officer

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