Fitch: May U.S. Jobs Report Supports Continued Monetary Easing
This morning's report on U.S. jobs growth in May from the Bureau of Labor Statistics, indicating that payrolls increased by 175,000 last month, likely signals a continuation of Fed asset purchases and monetary easing as questions persist about the fundamental health of the U.S. economy, Fitch Ratings says.
U.S. macroeconomic indicators remain mixed, and the pace of employment growth suggests that the Fed is unlikely to quickly end quantitative easing (QE) policies that have supported asset prices. While recent signs of a strengthening housing market are positive for U.S. credit fundamentals, slower global growth is limiting the potential for a robust labor market recovery.
The U.S. unemployment rate ticked up to 7.6% in May from 7.5% in April, while labor force participation improved slightly last month. Overall, the report provides little evidence of either a dramatic improvement or a worsening of labor market conditions.
We estimate that sustained average payrolls growth near 200,000 per month will be required to support the type of labor market recovery that would drive a decline in the unemployment rate to 6.5% by the end of 2015. The 6.5% rate has been identified as a target by the Fed in its guidelines for ending monetary easing.
The moderate pace of jobs growth evident in the May report suggests that the Fed's timeline for an eventual pullback in bond purchases may be pushed beyond late 2013, likely fueling renewed discussion of the impact that Fed policy could continue to have on asset prices and credit spreads.
U.S. corporate credit fundamentals have continued to strengthen since the end of the recession in 2009, providing some support for higher equity prices and tighter bond spreads independently from the role that QE has played in boosting risk appetite and asset prices. Our analysis of the relationship between major equity market indices and fundamental variables such as corporate profit margins suggests that central bank policy alone cannot explain all of the strength in equity and credit markets witnessed over the last four years.
Speculation surrounding the scale of the Fed's asset purchase program will continue to drive sentiment in equity and credit markets. However, we expect longer term asset price movements to reflect corporate fundamentals that cannot be obscured entirely by the flow of liquidity into the markets and a reach for yield by investors in a low rate environment.
Downside risks persist for U.S. corporate fundamentals, particularly since global macroeconomic conditions remain fragile, and revenue growth rates are expected to remain below pre-2008 levels. Expansionary capex is unlikely to grow significantly, and corporates will continue to focus on liquidity preservation in a slow-growth environment.
We believe U.S. firms will continue to face a difficult revenue growth outlook through the remainder of 2013, reflecting the slow recovery in the labor market, weak growth rates in the developed economies and fiscal drag tied to changes in federal tax policy and spending. Limited top-line growth is still leading companies to focus on operating cost reduction as the primary source of margin expansion. However, the incremental impact of cost-control initiatives on margins and cash flow generation will likely diminish as efficiency and restructuring gains are exhausted five years after the start of the financial crisis.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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