US Labor Market Report February 2018

The US Labor Market Report for February 2018 shows an increase of 313,000 added jobs to the nonfarm payroll employment. The unemployment rate was unchanged at 4.1% (Chart 1). Both numbers were reported by the US Bureau of Labor Statistics on 09 March 2018. This compares quite favorably with economists’ estimates who thought the number would be closer to 200,000. This is the highest increase in a single month since July 2016 (Chart 2). Total employment rose by 785,000. Year-to-year average hourly earnings have increased by 2.6%. This latter number was lower than the 2.8% economists expected.

The markets took this as indications that the economy continues to grow nicely while wages do not grow as fast as anticipated. This was interpreted as allowing the Fed to continue their gradual approach towards raising interest rates. If the wages growth is lower, it is expected to create less of an upward trend on inflation. As a result the markets responded with gains of major indexes of between +1.74% for the S&P 500 and +1.79% for the NASDAQ.

Our take on this is: we believe that although this may take some pressure off the Fed it nevertheless means that interest rates will continue to rise. The rate of unemployment is already low, the participation in the labor market is increasing and therefore employers will have to offer more money. This puts upwards pressure on wages. Growing wages in turn create more demand and that may push prices further up which is what we call inflation. It remains to be seen if the Fed is able to let inflation run to the value they feel comfortable with and then bring it to a stop with the currently planned measures.

We continue to believe that the higher and increasing interest rates are not sufficiently reflected in the valuations of the share markets yet. Some companies have increased their profits and/or their dividends and share buybacks, but some of the profits were windfall profits because of the tax reform and some of the dividends were special dividends that won't repeat. While we remain fully invested with our US portfolio we believe that the overall growth for this year will be more on the more moderate end of the spectrum. We are convinced that the Optarix US Portfolio continues to be well-positioned for the current scenario.

Happy Investing!

Source for images: Bureau of Labor Statistics, U.S. Department of Labor, https://www.bls.gov/news.release/pdf/empsit.pdf (retrieved 10 March 2018)