Solid Jobs, Rising Inflation Paves Way for Continued Hikes
Investors, oddly enough, were disappointed by the solid Jobs print for March as it solidifies the Fed's current interest rate path. While the number slightly disappointed analysts expectations, the 431,000 jobs created and the steady pace of declining Unemployment claims leaves no doubt the Fed will attempt to raise rates over the next 5-6 meetings. The Bond Yield Curve has responded in kind.
The yield curve inversion is something economists view when forecasting recessions. It's important to note that it is one signal, but not the sole signal, of recession.
The 2-year Treasury Bond Yield rose above the 10-year Treasury Bond Yield for the first time since 2019. However, this signal usually points to recession months in advance. The average time between yield curve inversion and recession is 13 months. The spread between the 10-year Yield and the 3-month T-bill Yield is more a forecast of near-term recession. For now, the economic data points to growth.
The talk of "stagflation" is a bit premature as the job market remains healthy. The U.S. Misery Index,
which first began to be tracked in 1948, measures the combined number of Unemployment and Inflation. Today, that number stands at 11.5 (3.6% unemployment plus 7.9% inflation). That is slightly elevated from the average of 9.2, but well below the 1980s peak of 21.9. As long as the labor market remains healthy, stagflation is not the likely scenario. In fact, the more likely scenario is recession within the next 12-18 months, which would end the stagflation talk.
The larger concern is inflation and the underwhelming wage growth. While Friday's Jobs Report was solid, yet again, wage growth continues to trail inflation.
Last fall, we noted the considerable increase in most commodities. At that time, commodities had risen more than 70% year-over-year, all while the Fed was downplaying inflation. Since then, those same commodities have risen more than 30% on average. Personal Spending slowed in February. If that trend continues, we would need to be concerned that inflation is changing consumer behavior.