U.S. futures are treading water ahead of the open on Friday, highlighting the cautious tone being adopted by investors ahead of the May jobs report and in response to Greece opting against repaying €300 million the International Monetary Fund today.
As was widely anticipated, Greece has today opted to bundle together four repayments due to the IMF in June into one repayment that will now be due to be paid on 30 June. While the move isn’t overly controversial, I do think there is a financial and political motivation behind it. Greece has made it clear all along that public sector wages and pensions would be prioritized and that is what it is doing. It can’t afford to lose the support of the Greek people at a time when they are already becoming frustrated with the process.
It also appears to be a statement to the IMF, the European Union and the European Central Bank that it will not be bullied and it to can cause problems for the others. It believes the institutions are taking advantage of the lack of liquidity to force and agreement that they deem unacceptable. They have their red lines and so far they have shown no desire to move them. It could be a case that we have a referendum or elections before a deal is done, along with some form of bridging loan as neither side appears willing to give in on pension reform or VAT.
While Greek negotiations will continue ticking on in the background with regular updates filtering out throughout the day, traders are primarily focused on the US jobs report today. While I am a firm believer that any report in isolation has little bearing on whether the Fed hikes interest rates or not, this one will give a strong indication of whether the US just suffered a slow start to the year or if the economy is in fact cooling.
This is all very subjective but in my view, three or four months of weak data can occur when temporary factors such as weather, currency strength and oil prices are taken into consideration. When we start to move beyond that, it starts to suggest that what was a transitory period of slower growth has morphed into something more problematic.
It is worth considering that job creation and unemployment have not displayed the kind of weakness that other data, most notably consumer spending, has at the start of the year. Only in March did we see poor job creation in the US, every other month has been well above 200,000. Therefore, if we do get a similar jobs report to last month, as we’re expecting, it won’t necessarily suggest the economy is finally waking up. However, a poor jobs report today may well suggest it remained sluggish in May at which point the Fed will have to seriously consider whether it is the right time to start raising rates.
Personally, I think there’s too much emphasis on job creation and unemployment. The Federal Reserve has a dual mandate, full employment and price stability. Unemployment is in the region that the Fed deems to be full employment, so what we should really be focused on is inflation, more specifically, what is going to drive it. Wage growth should naturally gather pace when the economy is at full employment but in this recovery, we are not seeing the kind of improvements that we ordinarily would and there’s a number of reasons for this – productivity, quality of jobs created etc.
The point is, once we start to see wage growth, it should naturally lead to higher levels of inflation down the road and this is what the Fed evidence of before it commits to raising rates. Clearly there is an appetite for rate hikes among the Fed and because of this, I don’t think it would take much for them to do so. But they need something and so far this year, they haven’t had much to work with. I would be more concerned by another 0.1% rise in average hourly earnings today than a sub-200,000 non-farm payrolls figure, and I’m sure the Fed would too.
The S&P is expected to open 2 points lower, the Dow 30 points lower and the Nasdaq 3 points lower.
For a look at all of today’s economic events, check out our economic calendar.