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February
3
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Week In Review

Employment

Nonfarm payrolls increased by 227,000 in January. Revisions to the previous two months’ reports resulted in 39,000 fewer jobs than previously reported. The unemployment rate rose to 4.8% from 4.7%, as the labor force participation rate rose to 62.9% from 62.7%. Average hourly earnings grew just 0.1%.

Our Take

Growth in average hourly earnings has been the bright spot of recent employment reports, as consumers who earn more can spend more. Hopefully this month’s weak earnings report is an aberration, as a slowdown in earnings would not bode well for GDP growth.


Japan

The Bank of Japan announced a smaller-than-expected purchase of bonds, and yields on JGBs immediately shot up well above 0.1%. The BOJ then stepped in and offered to purchase an unlimited amount of certain maturities at yields well below the market prices. JGB yields fell as markets digested the BOJ’s aggressive action.

Our Take

The whipsawing of JGB yields as the result of these two BOJ actions demonstrates just how distorted the JGB yield curve currently is. Yields in Japan cannot stay where they are without massive BOJ intervention, and the Japanese treasury cannot afford for them to rise.


FOMC Meeting

On Wednesday, the Federal Reserve Open Market Committee (FOMC) announced its unanimous decision to maintain the federal funds rate at the current target of 0.5% to 0.75%. According to the Fed statement, the labor market strengthened and economic activity expanded at a moderate pace. The committee also noted improved sentiment among consumers and businesses, but remained somewhat dovish on its outlook for inflation. Overall, the committee sees near-term risks to the economic outlook as “roughly balanced.”

Our Take

What was left out of this week’s statement was possibly more interesting than what was in it. Notably, there was no guidance as to the timing of the next rate hike. This decreases the likelihood of a March rate hike and even raises doubts about the three rate hikes for 2017 projected by the Fed in December. With all of the uncertainty surrounding the fiscal policies of a new administration in Washington, the Fed is clearly taking a wait-and -see approach and will be monitoring incoming data closely.


Manufacturing

Numerous manufacturing statistics were released this week. In January, the Chicago Purchasing Managers Index dropped from 53.9 to 50.3. The ISM manufacturing index rose from 54.5 to 56. December factory orders rose 1.3%, while nondefense capital goods orders excluding aircraft rose 0.7%.

Our Take

Manufacturing data was mixed, though positive outweighed the negative. The sector still faces significant challenges, such as weak worldwide growth and a strong dollar. If the recent positive trend can continue, manufacturing could add to GDP growth.


Municipals

Fitch Ratings downgraded Illinois general obligation bonds from BBB+ to BBB this week. The downgrade follows the Illinois senate’s failure to act on a bi-partisan budget plan. Fitch cited Illinois’ “unprecedented failure” to pass a complete budget for the last two fiscal years as a reason for the downgrade. Illinois had been operating under a six- month budget that expired at the end of December.

Our Take

The Fitch downgrade to BBB is in line with the Moody’s rating of Baa2 and S&P’s rating of BBB. Illinois lawmakers must work together to find a solution to end the budget impasse. Illinois needs to place a priority on cutting spending and enact significant pension reform. This week’s downgrade may lead to increased borrowing costs, something the state cannot afford.