The United States Department of Labor Bureau of Labor Statistics announced on Friday that total nonfarm payroll increased by 156,000 in December and the unemployment rate ticked up a tad to 4.7%. The revisions to the previous months saw the October number drop from 142,000 to 135,000 while the November figure was revised up to 204,000 from 178,000. The all important (ok not really) 3 month average now stands at 165,000 per month. Of more importance is that average hourly earnings in December increased by 10 cents to $26.00. This takes the 2016 average to 2.9% and this will get the FED to increase rates at a faster clip as wage growth typically is the precursor to inflation in a tight employment market such as in the US.
As tough as it is to find work these days, one can’t ignore the average overall unemployment rate being below 5% for all of 2016. By historical standards, 5% is considered to be ‘full employment’ which is when all available labor resources are being used in the most efficient way possible. Those that are unemployed within the ‘full employment’ are considered to be structurally or cyclically unemployed. When full employment is encountered, wages increase as the supply of labor shrinks and employees become more valuable. As those who are employed receive increasing wages, their disposable income increases and this combination has previously produced inflation.
This is the type of inflation that the FED will notice. This is the type of inflation that the FED has wanted to see for many years. This is the inflation that has to be contained by raising interest rates. This is the inflation that many central bankers in the developed world want themselves. This is the inflation that we have been hearing about that was expected in the ‘medium term’. This is the inflation that could quite possibly wreck the government-induced bubble in the bond market and send the US dollar to new highs in 2017.
As the inflation scenario unfolds in the US, the FED will quickly have to be seen to be ‘out in front of it’ meaning that they have the inflation genie under control. The FED will have to raise rates sooner and higher than the market previously thought. The difficulty here is that the widening interest rate differential globally will continue to fuel demand for the US dollar. In addition to the widening interest rate differential between the US and say Europe (socialized economy) or Japan (Abi-normal), the fiscal machine looks set to roar again in the US.
Before the new president is even sworn in on the 20th the rumors are circulating and theories are being tested on what business in America might be like with a Trump presidency. It will be very interesting to see who, what, where, when, and how the fiscal beast is unleashed and this change in approach provides my macroeconomics students with a daily update on how Trumpism is going to make America great again.
Rising US interest rates and the belief that a fiscal boost from the incoming administration will be enough to keep the US dollar headed higher, and probably a great deal higher is 2017. If the US bond market falls out of bed and volatility continues to rise in that market one should also brace for increased currency volatility as well. Stay long US dollars my friends.