Emma Wall: Hello, and welcome to the Morningstar series, Market Reaction. I am Emma Wall and I'm joined today by JPMorgan's Mike Bell to talk about Friday's U.S. employment figures.
Hi, Mike
Mike Bell: Hi.
Wall: So, on Friday we should expect to have US employment figures, probably not a data point that the average UK investor has really given too much thought to until recently because it was employment figures in the US, which was one of the main causes of the global market sell-off last month, wasn't it?
Bell: To be honest, it's always been one of the most closely watched figures in markets, if not by the common man on the street. And what everyone was focused on last month was the fact that the wage growth numbers picked up to 2.9%. Now what everyone is going to be very focused on this month is to see whether that number comes down slightly because that was an adjustment in the numbers because of the bad weather that's been affecting America, the number of hours worked we think fell, and as a result that boosted the average hourly earnings slightly higher than it would be. So, consensus forecast is that that number falls to 2.8%, slightly down from last month. Were that to not be the case and actually you saw average hourly earnings picking up further, I think that would cause markets to take the view that actually the Federal Reserve was even more likely to be putting a foot on the brake.
Wall: And this is the thing with markets. Its expectation versus reality, isn't it, which causes this volatility and you're saying if the consensus view proves right, we shouldn't expect too much movement? However, if it surprised on the upside, then we could be in for another bout of volatility.
Bell: Yeah, I think the risk for markets at the moment is definitely a concern around building inflationary pressures. So, if consensus is correct and wage growth just stabilises at around 2.8% level, then market should be fine with that but were we to see a number showing wage growth coming in at, say, north of 3% year-on-year, I think there would be another bout of market volatility as people start to price in the fact that the Fed would, therefore, be more likely to tighten monetary policy at a faster pace than otherwise. Now already, we are of the view that the Federal Reserve is going to put interest rates up four times this year, but if you start to see signs of building inflation pressures then markets could get concerned that actually they end up having to do more than that.
Wall: And we don't have to wait too long to hear what the Fed is going to do about interest rates. So, I think they are meeting on the 21st of this month. Should we expect, given the view of four raises this year, that to be a date where we do see US interest rates rise?
Bell: I think the Fed are probably going to raise interest rates every quarter. So, we'll see one coming up in March, and then we'll get another rate rise around the middle of the year. I think they'll just go every quarter probably until it ends up overtightening and eventually, perhaps sometime in late 2019 or even in 2020 causing the US economy to slow. Because the unemployment rate is probably going to keep falling. So, in we’re in a world now where we could see US unemployment fall from already very low levels to somewhere around 3.5% by the end of the year.
Wall: But, again, these are things that are expected by the market. So, if the Fed does raise rates in a couple of weeks, we shouldn't expect too much impact on markets?
Bell: So, at the moment, the markets now moved – if you think back to September of last year, the market was expecting very little in terms of rate rises this year, is now moved to price in pretty much three rate rises. As I say, we think four is the most likely outcome and there's only about a 25% probability of that currently being priced in. So, it's just there's a little bit further to go in market pricing, but most of that is already in expectations as long as we don't get significant upside surprises on the wage data.
Wall: And the Fed is not any central bank meeting that week. The next day we should expect to hear from the Bank of England. Do you think they will also be raising rates that week?
Bell: I think that's unlikely. I think the key thing for the Bank of England is going to be whether we get a transitional deal. If a transitional deal can be agreed before May, then I think the Bank of England want to be putting interest rates up in May and possibly, if we get the transitional deal by then, then even again in November. Without a transitional deal and all the political uncertainty that would come with that risks of a hard Brexit, I think that would cause the Bank of England or at least it should cause the Bank of England to delay with their rate hiking path.
Wall: Mike, thank you very much.
Bell: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
