Yesterday's impressive gains on Wall Street helped lift global bourses today, with the Nikkei advancing 5% and major European indices gaining almost a full percentage point. Global bond markets are posting modest gains as well and profit-taking has given pause to the dollar's strong rally this week. The market anxiously awaits the release of February U.S. jobs data, which will set the tone for a host of reports due out over the coming weeks.
The consensus calls for around a 250,000-job increase in U.S. nonfarm payrolls and possibly a small decline in the overall unemployment rate.
The market has systematically underestimated the strength of the U.S. economy. Job creation has run consistently above market expectations in recent months and statistical and anecdotal evidence suggests this pattern may continue with today's report. The whisper number calls for a gain of 320,000 jobs. Given the strength of the economy and heightened concern that the tight labor markets will begin fueling price pressures, the market will pay close attention to the average hourly earnings, which are expected to have risen a couple of cents.
Many observers suggest the rise in the U.S. equity market is source of the rise in U.S. consumption.
In the fourth quarter, U.S. personal consumption rose 7% in real terms from the year-ago quarter. Had it simply maintained levels recorded in the 1997 fourth quarter, the U.S. economy would have expanded around 0.7% rather than the 4% that was actually record in 1998. That would have reduced world growth by almost 1%.
Yet studies suggests that about a third of the growth in consumption can be traced to the "wealth effect" of rising share prices. I suggest developments in the labor market have been just as crucial. Consider these three statistical facts: First, the U.S. has created 3 million jobs a year since 1996. This compares to 2 million jobs a year in the first five years of this expansion cycle. Second, the percentage of the population in the workforce (known as the participation rate) has risen from two-thirds in 1996 to nearly three-quarters today, which is a record high. Third, not only are more people working in raw terms and as a percentage of the population, but also they are receiving higher wages. After years of stagnation, wages have begun rising. Wage growth averaged around 3% per year in the 1993-1996 period; over the last two years it has been averaging closer to 4%. The purchasing power of the nominal wage growth has been bolstered by the fall in inflation.
This week's issue of Business Week suggests Federal Reserve Chairman Greenspan is content to keep rates on hold
, for fear that a new financial shock would roil an already fragile world economy. The article suggests that Federal Reserve officials expect growth in the U.S. economy to slow toward 4% this quarter after the heady 6%-plus rate of the fourth quarter, and productivity gains, which posted their biggest rise in nearly a quarter of a century, to contain price pressures.
The market is not as sanguine. The July fed funds futures contract, which, given that the June meeting happens at the end of the month, is best gauge for market expectations for June, implies the market has discounted a 25-basis-point hike with 80% confidence. Or to say the same thing, the market has priced in 20 of a possible 25-basis-point rise. In the market's mind, the question is whether this hike is just a one-off move, taking back that insurance policy. The September Fed funds futures contract, which suffers from the lack of liquidity, suggests the market currently calculates a 20% chance of a second hike in the third quarter.
The Bank of Japan reduced the surplus in the banking system
from 1.8 trillion yen that had been maintained for the past several sessions to 1.4 trillion yen. The BOJ also bought 200 billion yen of bonds through its coupon pass called a rinban operation. In addition, the BOJ also bought 400 billion in commercial paper. The BOJ's stance remains highly accommodative and the bond market was able to extend its rally.
The yield on the benchmark bond fell another 5 basis points to bring this week's decline to 33 basis points. The drop in money-market rates this week is seen as forcing investors to move out on the curve and this is increasing the interest in medium and longer-term instruments. Japanese exporters were reportedly the featured dollar sellers earlier today. Initial support for the greenback is seen near 122.50 yen.
Profit-taking has also weighed on the dollar against the major European currencies, but losses have been mild.
Initial support is pegged near 1.7980-1.8000 marks or roughly $1.0880 for the euro. Similar support against the Swiss franc is seen in the 1.4600-1.4650 band. Although a strong U.S. jobs report tends to attract dollar buyers, there is the risk given the dollar's run-up this week that a "buy the rumor, sell the fact" type of trading will follow the initial reaction to today's report. There is some talk of a similar type of reaction in the U.S. debt market.
Note that Brazil hiked overnight rates to 45% yesterday from 39% and the C-bonds, which are the most commonly traded Brazilian dollar bonds rallied for the first time in nearly two weeks. The yields fell 37 basis points to yield 17.37%. The Bovespea rallied 3.7%. The central bank sold dollars, fueling a 4% rally in the real. The rate hike coupled with the new plans to cut government spending is likely to lead to a new
agreement as early as today. IMF officials have been meeting in Brazil for the past three weeks. The so-called technical memorandum that outlines the agreement may not be released until next week, as leading finance officials and central bank officials go on a road trip to the world's major financial centers to convince investors to end the capital strike against Brazil.