PETALING JAYA: A number of markets globally have been dragged marginally lower this week after the United States revealed its non-farm payrolls report for January, showing the country has created 517,000 jobs in the first month of the year, far oustripping the consensus forecast of 185,000.
Global markets that saw declines early this week after the jobs report was released include the Dow Jones, the S&P 500, Hong Kong’s Hang Seng Index and Malaysia’s own FBM KLCI.
The dollar also appreciated to RM4.30 per unit yesterday from Friday’s level of RM4.26.
Summarily, non-farm payrolls detail the number of people employed in the United States, excluding the farming industry, and historically, a rising trend has been good for the greenback and vice versa.
Job creation is the primary indicator of consumer spending, which accounts for the majority of economic activity.
The immediate question to be asked then is, why would investors react negatively to what is supposedly a piece of good news, since does it not follow that a strengthening labour market signifies the economy returning to health?
In their own bizarre way, equity investors view a strong labour report negatively in the context of the near term, as it means that the Federal Reserve (Fed) has enough headroom to keep raising interest rates, because a good jobs market could generate higher demand, and therefore, more inflation.
A high interest rate environment is a scenario that bodes poorly for Asian stocks, and the Fed’s rate hike cycle has destroyed regional markets through 2022.
Speaking to StarBiz, chief investment officer for fund managing firm Tradeview Capital Sdn Bhd Nixon Wong said the healthy job data raised the likelihood of the Fed keeping with its inflation-fighting interest rate hikes, while implying a higher chance of another 25-basis-point (bps) hike and reducing the possibility of an eventual rate cut during the year, which is sending US equities lower and propping up the dollar.
“According to consensus estimates, the likelihood of another 25-bps hike in March has risen from 81% earlier this month to close to 98% at present.
“With that, the strength of the greenback could persist longer until there are signs of easing inflation numbers and the Fed begins pivoting its monetary policy, probably in the second half of 2023,” said Wong.
He noted that as Asian stock markets tend to be positively correlated to global equity market movements, they are likely to see retracement following the increased expectation of US interest rate hikes to persist further, in particular markets with lower yield profiles.
Wong added that a strong dollar may bring back the focus of fund flows to the United States as investors continue to be on the hunt for short-term higher yielding assets such as bonds or interest rate products that benefit from the rate hikes.
“That being said, the United States is projected to face recessionary risk when the current multi-year-high interest rate environment hits economic and personal consumption growth.
“We believe this will eventually shift investors’ focus back into Asian equities that offer relatively healthier growth, which is also helped by the reopening of China’s economy,” he said.
Two weeks ago, in its worldwide macroeconomic research note, Goldman Sachs head of global investment research and chief economist Jan Hatzius, reading off the US December payrolls report, said average hourly earnings had decelerated sizeably, especially after adjusting for compositional shifts between high and low-wage sectors.
Hatzius also said wage measures like the Atlanta Fed’s Wage Growth Tracker, which measures the wage changes for individuals in household surveys over a three-month period, are also showing meaningful wage deceleration.
He commented, “If nominal wage growth remains in the 5% range, it would be hard to believe that core inflation could fall to 2% to 2.5% on a sustainable basis. But if nominal wage growth continues to decline to the 4% range by the end of this year as we expect, that would be consistent with inflation returning to the neighborhood of the Fed’s 2% target.”
Seemingly providing a balance to Hatzius’ view, professor of economics at Sunway University Yeah Kim Leng said unless there is an increase in productivity, the healthy jobs market numbers in the United States adding to demand-pull and wage-price pressures will likely see the Fed assuming a more hawkish stance, given that inflation will likely remain elevated further and longer from its 2% target.
Yeah said if the Fed reassumes its hawkish stance, other currencies, especially in the emerging markets, could face a hard time.
If inflationary figures buck the downward trend as a consequence of the healthy jobs market, he believes that short-term dollar strength is expected to persist, given that the longer-term currency fundamentals such as weak growth as well as fiscal and current account deficits have had muted influence on the dollar’s strengths.
Moving forward in the year, Yeah said Asian economies with high import dependence and weaker growth fundamentals will face stronger exchange rate declines.
“Vulnerable currencies are likely to weaken further while the ringgit with stronger underpinnings such as oil and other commodity exports, along with sturdier domestic-driven growth will likely fare better in a strong dollar environment, until the US economy falters and inflation comes off significantly to allow the Fed to reverse the interest rate trend,” he projected.
Looking even deeper beyond the knee-jerk reaction, Center For Market Education chief executive Carmelo Ferlito told StarBiz that the US job market is enjoying the current momentum partly because of the post-lockdown recovery and artificial support coming from its government’s expansive fiscal policies.
“Therefore it is likely that most of the jobs created as an effect of the support measures will fall back once the effect subsides and the main consequence of this, which is inflation, would force the economy into a contractionary restructuring,” Ferlito said.
Elaborating, he said while markets, including currency exchanges, were reacting nervously on the concerns that more jobs would likewise increase demand, exacerbating price tensions and consequently rate hikes; one of the primary root causes of inflation are ironically the fiscal support packages that were initially welcomed.
“Meanwhile, the relationship between currencies may remain volatile, which will be highly influenced by contrasting data and future policies on which we know very little at the moment,” he noted.