Never mind the weak US employment data – keep an eye on inflation

published 9 May 2016

160509-us-employment — US employment figures are among the most important economic data releases in the world

OK, looks like you can forget about an interest rate rise from the US Federal Reserve in June.

Chances are, that means you can forget about one until after the US election in November. It's the perfect excuse for the Fed not to act.

But don't necessarily think that it means we're heading for another deflationary slump

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The US jobless data disappoints

There's not really any particularly good reason for this. The numbers are revised frequently. The margin of error is significant enough that any number thatfails to meet expectations could in all likelihood have beaten them in reality (or vice versa). So it doesn't make sense to attach that much importance to them.

Still, they're all we've got. And the reason they matter so much is that they are perceived to have a big impact on what the Federal Reserve might do next. And as the Fed essentially controls the price of the most important currency in the world, that matters to asset markets and everything else.

Friday's numbers were disappointing. The US added 160,000 jobs in April. That was well below the hoped-for 200,000, and the weakest showing in seven months. The unemployment rate remained unchanged at 5%.

The instinctive reaction is to assume that the Fed won't be raising rates in the short run. And that's probably right. It gives the Fed the perfect excuse to stay cautious and "data dependent".

Equally, however, don't think that it means we're heading for another deflationary plunge. Not yet, anyway.

Annual earnings growth came in at 2.5%, compared to 2.3% last month. On an annualised basis, notes Reuters, wage inflation is now running at more than 3% since the start of 2016.

That's pretty impressive, especially by recent years' standards. With commodity prices bouncing back as well, we could see inflation picking up significantly in the coming months.

I wouldn't expect the Fed to do much about this. I also suspect that most of the weakness (for the time being) is now priced into the US dollar it didn't show much reaction to the weak jobs data.

But hang on to your gold. This is just the start.

The government is getting nervous about Brexit

George Osborne was on ITV at the weekend. Apparently, the chancellor got straight to the heart of what matters to the electorate when it comes to Brexit: house prices.

"This isn't just a big question about who we are as a country. This goes to the heart of people's financial security. I am pretty clear that there will be a significant hit to the value of people's homes and to the cost of mortgages. That is one example of the kind of economic impact that we get from leaving the EU."

As I've pointed out on a number of occasions, in every country around the world, there are certain key indicators that the government keeps a particular eye on, because it knows they are close to the electorate's hearts. Inflation and unemployment matter in most places, but each country has its own quirks.

In the US, one such key indicator is the level of the S&P 500. And in the UK, it's house prices. The average UK homeowner and so the average voter takes the economic temperature by considering how much their home has "earned" over the past year. If it's pulling its weight, all is well. If not, it might be time to vote for a different set of politicians.

For Osborne to pull this one out of his hat suggests he must be getting a bit edgy about the polls. If Brexit really has the economic impact he's trying to make out, then mortgage costs are more likely to fall than rise, given that the Bank of England would almost certainly have to cut interest rates against the post-apocalyptic break-up scenario that "Remain" is arguing for.

I agree that there might be some short-term disruption, but in all honesty I don't think Brexit will give us lower house prices. And I might be even more inclined to vote for it if it did.

By the way, make sure you don't miss this week's issue of MoneyWeek magazine. Merryn has an exclusive interview with Boris Johnson all about Brexit I think you'll enjoy it, regardless of how you plan to vote. (If you're not already a subscriber, sign up now however the referendum goes, you're going to want to know what it means for your money).

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.