Good news on jobs again is bad news for stocks and bonds. A stronger-than-expected May employment report means the Federal Reserve remains on track to raise its key interest rate by one-half-percentage point in June, July, and likely in September.
The Bureau of Labor Statistics Friday reported a 390,000 increase in nonfarm payrolls for this past month, above economists’ guesses of around 320,000, though it was offset by a slight net downward revision of 22,000 for the two preceding months. Average hourly earnings rose 0.3% in May, unchanged from the preceding month, and were up 5.2% from a year earlier.
The separate survey of households showed the unemployment rate holding steady at 3.6% for the third consecutive month, although May’s data showed a positive uptick in labor-force participation. The broader so-called underemployment rate (U6), moved up to 7.1% last month from 7.0%.
None of these data are likely to induce the Fed to slow its pace of rate increases. The CME FedWatch site shows half-point hikes remain near-certainties, based on federal-funds futures prices. And a September half-point rise has a 62.6% probability, nearly double that of a week ago, when fixed-income markets were betting on a slowing in the pace of Fed rate increases.
While payrolls growth has slowed from the 500,000-plus average pace of the past 12 months, consumer price inflation is running at over 8%. There is agreement both in Washington and on Main Street that soaring prices are the nation’s top problem. Of course, the Fed can’t do anything about the jump in energy costs or supply shortages, but it remains up to the monetary authorities to rein in demand to slow the pace of price increases.
And while payrolls are still 822,000 below their pre-Covid 19 levels, the overall jobless rate is only 0.1 percentage point above where it stood in March 2020. At any other time, monthly payroll gains over 200,000 would be considered a strong labor market. Moreover, the latest Jobs Openings and Labor Turnover Survey for April, released earlier this week, showed 1.9 job vacancies for every unemployed person.
To be sure, these are backward-looking measures. An array of technology companies have announced hiring pauses and even some cutbacks following sharp declines in their stock prices. On Friday,
(ticker: TSLA) CEO Elon Musk was reported by Reuters to be seeking a 10% cut in the company’s 100,000 employees based on a “super bad feeling” he had about the economy.
Whether such job cuts spread remains to be seen. New claims for unemployment benefits, a leading indicator of the labor market, continue to run in the low 200,000 weekly pace; anything below 300,000 is consistent with a healthy job market.
“This report continues to show an extremely tight labor market,” writes Conrad DeQuadros, senior economic advisor at Brean Capital, in a client note. The relatively subdued rise in overall average hourly earnings also disguises better wage gains for rank-and-file workers, according to Thomas Simons, money market economist at Jefferies. Nonsupervisory employees scored 0.6% increases in average hourly wages, he notes, while slower gains in supervisory and white-collar jobs held down the overall rise.
Bottom line: Nothing in the latest employment report points to a pause in the half-point hikes in the fed-funds rates, notwithstanding Atlanta Fed President Raphael Bostic’s suggestion earlier this week of such a pause in September. The central bank remains on a path to normalization in policy, which points to a peak in the fed-funds target at 3.25%-3.50% around mid-2023, compared with the current 0.75%-1% range.
At the same time, the Fed has begun the process of winding down its near-$9 dollar balance sheet, which roughly doubled in size from before the pandemic’s start over two years ago. The employment data suggests monetary tightening is nowhere near done.
The Fed has only just started the process of monetary tightening, which is nearly always negative for stock and bond prices. Investors shouldn’t be swayed otherwise.
Write to Randall W. Forsyth at firstname.lastname@example.org
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