Email this article	Comment on this Article	Print this article

No surprise that the market pays so much attention to unemployment and payroll data

Much has recently been said about the US recovery and the way in which the stock market has responded towards the economic expansion since 2001.

It is interesting to note that the recovery of the economy only managed to reach historical trend growth levels (4%), despite interest rates declining to 1% at the end of 2003. Looking at the long-term trend of the US economy though, it has the word "mature" written all over it. 

With it being a service based economy, consumption will always be a very important factor in their lives. After all, final consumption largely determines investment and production and it should therefore be no surprise that the market pays so much attention to unemployment and payroll data.

Looking at the chart it is clear that wage growth has caught up with the growth in the labour market. This is logical, seeing that adding more people to the payroll grows the wage bill as well.

The problem is that the US economy has been relying on productivity growth for the last decade in a disinflationary environment to maintain profit margins. The two major reasons for the slowing profit growth in the US are wage growth that is rising faster than productivity growth and the high base effect from prior years' profits. S&P profit growth could slide below 10% towards the end of 2006, which could be a drag on equity market performance.

While the growth outlook for the global economy is still intact and global demand is still resource intensive, the marginal buyers are likely to remain in emerging markets at the expense of developed markets. This ties in with our bullish secular call on commodities, which is also emerging market driven, and will play out over the next couple of years with plenty of bumps along the way.

During this secular change the world will become less dependent on the US consumer, which could be a self balancing event in terms of current account deficits and currency pegs. 

Risk appetite thus far have been driven by a growing world economy, strong investment demand for emerging markets, and also improving country specific balance sheets in the emerging market universe. We have seen many Moody's and S&P upgrades in emerging market debt ratings, which is largely a function of these improvements. 

The continued allocation of funds to emerging markets will also depend on the extent of the interdependence between emerging markets and developed markets. Globalization will always be a factor in synchronized global growth, but the rise of the emerging market consumer could be the sustaining factor of long term capital allocation to this part of the market.