Jobs, the Fed and an Italian Referendum

The U.S. economy continues to produce jobs at a strong pace, as this past month saw 178,000 jobs created, in line with consensus estimates.  The unemployment rate fell to 4.6%, which is the lowest level since 2007.  The total measure of unemployment (the U6 rate), fell to 9.3% which is the lowest since April 2008.  Job gains were seen in across all of the major categories, with only manufacturing experiencing a decline for the month.  September figures were revised higher, but were offset by a lower revision to the October report.  The less volatile three-month average remained at 176,000 jobs created, which is in line with the 180,000 average for the year.

Despite continued strength in the overall figures, there were two aspects of the report that disappointed.  Wages declined by 0.1% versus consensus estimates of +0.2% growth, and this was the first sequential decline in two years.  Year-over-year wages fell from +2.8% to +2.5% for the month, although this still shows solid growth trajectory relative to earlier this year.  However, given the reliance on consumer spending for GDP growth, this trend will be watched closely in the coming months to see if wages stagnate.  Furthermore, the participate rate fell for the second month in a row as people dropped out of the workforce.  This was one of the reasons for the sharp decline in the unemployment rate, as more workers found jobs than left the workforce.

Earlier this week, the U.S. Commerce Department released their second estimate of Q3 GDP, and growth was revised higher from the initial estimate of 2.9% to 3.2%. This is the fastest growth experienced in the past two years, and was driven primarily by higher household spending and an upward revision to residential investment. The latter saw upward revisions to single-family housing and to data on deals of building materials and garden supplies, which has recently benefited our exposure to the housing sector. Household spending is expected to continue to drive growth in Q4, as recent Black Friday and Cyber Monday sales figures were record highs.

The recent economic data suggests that the Federal Reserve will raise rates when they meet on December 13-14th.  In fact, Janet Yellen and other Fed Governors have stated recently that the case to raise rates has strengthened significantly.  With that said, we see the potential for volatility around this decision as the Fed may raise rates higher than expected or alter the trajectory of rate hikes given the strong data and uptick in inflation. This has the potential to negatively impact markets.  Furthermore, Italian citizens will be voting over the weekend on a referendum on constitutional reforms.  Many view this vote as a referendum on the European Union (EU), similar to Brexit earlier in the year. A vote of “No” has the potential set in motion the country exiting either the Euro currency or the EU all together.  Given the uncertainty surrounding interest rates and geopolitical issues abroad, we have maintained cash levels raised prior to the U.S. election.  We will continue to monitor the current environment and deploy cash as we see opportunities to invest.

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