US: Markets unimpressed by labor market report and new Fed chair

US – Markets unimpressed by labor market report and new Fed chair

Emerging Markets – Capital keeps flowing in

Further improvement on labor market, new Fed chair should offer continuity

At first glance, non-farm payroll growth fell short of expectations (+313,000) and reached +261,000 in October, offsetting the impacts of Hurricanes Irma and Harvey last month. The September data was revised from -33,000 to +18,000 and August from +169,000 to +208,000. Therefore, the two-month payroll net revision amounted to +90,000. Despite a further decline of the unemployment rate to 4.1%, average hourly earnings showed a lower increase of 2.4% y/y compared to last month's 2.8% y/y.

Today's labor market report reflects once more the ongoing recovery, although wage dynamics still lack a convincing upward trend. There was barely any market reaction, as the release just confirms the widespread expectation of a rate hike in December. Yesterday, President Trump announced his nomination of Jerome Powell as the next Fed chair. Powell is currently the Fed governor and he has worked alongside Janet Yellen for the last five years, supporting her decisions. Therefore, the current monetary policy stance, with gradual, data-driven interest rate normalization, should be continued. His academic background is in law (and not economics) and it is said that he might introduce some regulatory relief. In our view, this nomination offers continuity and thus the financial market reaction was subdued.

Emerging Markets – Capital inflows support growth outlook

Based on first estimates from the IIF, the positive capital inflows destined for Emerging Markets kept going in October, with a volume of around USD 13.6bn. On a regional basis, especially Asia (mainly India and Indonesia) and Latin America benefited the most in September and October.

The continued capital flows into Emerging Markets are also reflected in a persistent good currency development in many of these countries. In addition, the capital flows are enhancing the growth prospects of the corresponding countries, in our assessment. The Eurozone's export growth, and hence ultimately the entire Eurozone economy, should also benefit from the good economic condition of Emerging Markets over the coming months. In 3Q17, the Eurozone again slightly exceeded expectations with GDP growth of 2.5% y/y. France, for instance, registered the highest growth rate within a quarter since 2011, with GDP growth of 2.2% (based on consumption and investments) in 3Q17. This positive economic momentum should facilitate further reform measures for Macron. Therefore, at present, it is above all the weak dynamics in core inflation (which decreased from +1.1% y/y to +0.9% y/y in October) that remain the primary problem from the Eurozone's perspective. Especially in France, the level of core inflation is particularly low (+0.6% y/y in September), though this should change over the coming months, due to the current economic dynamics, in our assessment.

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