Markets have become used to 300k+ payroll prints. It is easy to forget, however, that this was a rarity pre-pandemic. Even if payroll growth eventually slowed to 100k, this would still be more than enough to keep the labour market very tight. Indeed, ‘trend payroll jobs growth’ in the US is estimated to be around 65k/month. The US added 339k payrolls in May.
Headline-grabbing job cut announcements have not dented hiring plans in the real economy. Unlike in 2022, higher real yields are not hitting stock market sentiment either. A sustained rally in equities over the summer could push the job openings rate back to recent highs. As a result, the labour market will remain tight.
The signalling mechanism of US industrial policy is crowding in strong private sector investment. Manufacturers are rapidly building out capacity, setting the stage for a construction investment ‘mini-boom’. In real terms (deflated by the construction PPI), the 3m/3m annualised rate for manufacturing construction spending surged by 176% in April.
China’s weakness has been compounded by industrial policy in the US. As such, soft Chinese growth prospects may not be such a boost to US Treasuries, if accompanied by a fiscal boom in the US. With non-residential construction spending surging, it is difficult to envisage that a recession – widely forecast – will happen this year. There is little reason for US Treasuries to rally sharply, even if durables deflation returns to the US. The Fed will not cut rates if the US stock market continues to climb, and investment spending remains strong.
