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US stays in the Goldilocks zone

Wed, 06/08/2014 - 11:44

The current state of the US economy is ‘just right’, according to Alan Higgins, Chief Investment Officer, UK, at Coutts… 

Recent data shows the US economy is still in the Goldilocks zone – not so hot that the Federal Reserve (Fed) will have to put rates up sooner than expected, and not cold either, but just right. We see US interest-rate rises as still being some way off, and only gradual when they do come, so not a big worry for equity markets for now.
Recent comments from the Fed have suggested that Chairman Janet Yellen and her colleagues don’t view job growth as inflationary, with enough slack in the labour market to keep wages subdued. This would allow the Fed to keep rates at their record low for a while longer.

Friday’s jobs report was in line with this view, showing unchanged hourly wages and a slight uptick in the unemployment rate from 6.1% to 6.2%. This reflects a slight rise in the labour force participation rate to 62.9%, which is still low by historical standards.

The 209,000 new jobs added in July were slightly below the 233,000 expected, but this was the sixth consecutive month of growth above 200,000, which confirmed a continued strengthening trend in the labour market.

Data last week also showed the US economy bouncing back from its first-quarter contraction to record a surprisingly strong 4% annualised pace of growth in second-quarter gross domestic product (GDP). The healthy jobs report was coupled with good news from the ISM index of US manufacturing activity, which jumped to 57.1, its highest since April 2011.

Compared to low-yielding bonds, equities remain better valued, under-owned by historical standards and more likely to benefit from the continued recovery in global growth that we envisage. With further upside for bonds limited by the global recovery, we are anticipating that investors’ exposure to equities will return to more ‘normal’ levels.

Of course, escalating sanctions against Russia could cause some drag on economic growth, and this remains the major political risk facing global markets. But we continue to expect steady improvement in the global economic outlook, and see room for continued optimism in equity markets.


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