Macquarie says US unemployment is going a whole lot lower, and that means bond yields are likely to go a whole lot higher

Mario Tama/Getty ImagesUnemployment could fall to the lowest level since the early 1950s.
  • One year ago US 10-year government bond yields were marginally above 2%. Now they sit at a seven-year high of 3.25%.
  • Macquarie Bank expects they’ll go a lot higher, forecasting a move to 3.75% by the end of 2019.
  • It sees US unemployment potentially falling to just 3.1% or lower, helping to boost wage and inflationary pressures in the period ahead.

If US 10-year government bond yields at 3.25% are already giving you the heebeegeebees, you ain’t seen nothing yet.

According to economists at Macquarie Bank, they’ll scale 3.75% by the end of next year, bolstered by “unrelenting downward pressure on unemployment” that will help to lift wage and inflationary pressures.

“Over the past 12 months payrolls growth has averaged 211,000, the fastest pace in two years,” says David Doyle and Neil Shankar, economists at the bank.

“This has occurred despite eight rate hikes over this time period, illustrating a lack of progress towards navigating the labor market towards a more sustainable pace of growth.

“Indeed, the pace of payrolls growth remains roughly triple that of underlying labor force growth. In this context, it is no surprise that new lows continue to be reached in the unemployment rate.”

So how low will unemployment go?

A lot lower, according to Macquarie.

“Unemployment is likely to continue to reach new lows in coming quarters and could fall to 3.1% or lower by the end of 2019,” Doyle and Shankar say.

“[Unemployment] remains above prior cycle troughs for those with more education… suggesting there remains scope for headline unemployment to continue to push lower as wage growth shows further improvement.”

If correct, that would leave unemployment sitting at the lowest level since the early 1950s.

Given an unemployment rate that low would almost certainly lead to widespread skill shortages, it’s unsurprising that Macquarie sees wage growth continuing to accelerate in the year ahead.

“For the fourth month in the last five the annualised monthly gain exceeded 3.5%,” says Doyle and Shankar, referring to private average hourly earnings.

“This is the first time this has occurred in the series history which dates back to 2006. Over the past six months, the annualised gain has been 3.3%, its strongest pace since 2009.”

Macquarie Bank

Macquarie says there’s a clear risk that average hourly earnings could lift by more than 3% in the year to October, up from 2.8% in September, leaving it at levels not seen since April 2009.

“Our proprietary ‘bottom up’ sub-industry measures — weighted by both employment and hours worked — provide another reason to anticipate strong wage growth,” Doyle and Shankar say.

“These have been leading the headline measure higher in 2018 and both now suggest 3.1% year-on-year versus the 2.8% indicated by the Bureau of Labour Statistics measures.”

Given the backdrop of ultra-low unemployment and stronger wage growth, helping to boost domestic demand and inflationary pressures, Macquarie says this will likely see US bond yields continue to lift.

“[Wage] momentum should continue to gradually build over the next 12-18 months, a key input into our view that the 10-year treasury yield should reach 3.75% by the end of 2019.”

Given the investor reaction to recent the spike in yields, that suggests financial market volatility could also increase, especially if the potential lift in yields is abrupt in nature.

Based on the labour market forecasts offered by Macquarie, the latter is a clear and growing risk.

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