What's going on?
US employment data out on Friday showed the world’s largest economy added more jobs than expected last month – but wage growth slowed.
What does this mean?
Hiring in the US remains strong. 263,000 new jobs were created in April, while unemployment sank to 3.6% – its lowest level since back in the winter of ‘69 (tweet this). Wage growth, however – often seen as a sign of consumer spending power – was stuck at 3.2%, slightly below expectations. And despite the positive headlines, a slight cooling of activity in the key US services sector may have combined with fresh suggestions of a forthcoming interest rate cut to drive down the value of the dollar.
Why should I care?
For markets: The Fed’s dilemma intensifies.
Despite the US economy’s slew of recent positive economic data, inflation – the rate at which the prices of goods and services rise – remains stubbornly low. Inflation data out on Monday showed that “core” inflation (which excludes food and energy prices) rose a mere 1.6% in March versus last year, barely more than slowpoke Europe and well below the American central bank’s 2% target. In theory, growing employment and wages should be accompanied by a pick-up in inflation, given that people have more money to spend – that would mean a rise in interest rates to stop inflation getting too high. But this hasn’t been the case – and the Federal Reserve is now coming under pressure to cut rates and potentially boost growth.
Zooming out: Don’t learn Japanese.
For central banks, maintaining steady economic growth alongside low unemployment and inflation is paramount – and interest rates are a key weapon in their arsenal. In Japan, years of quantitative easing have failed to boost growth and inflation. While Japanese interest rates have remained close to zero, the country’s central bank now owns half of all the Japanese government’s bonds. The US is only just shifting the last of the bonds it acquired following the last financial crisis; yet some notable teetotallers are now calling for a fresh round of buying.