Weekly Market Pulse: Who’s The Boss?

I told you last week that there were strange things going on in the labor market but I had no idea how much of an understatement that really was. Much of last week’s economic focus was on the inflation report but I think the JOLTS report may turn out to be more significant. Inflation was indeed pretty hot year over year but that wasn’t unexpected. It wasn’t all about base effects either as our Jeff Snider pointed out. The bond market reaction to the CPI report was not as expected though and that gives us reason to believe that, for once, the Fed is going to get something right. This “inflation” is probably of the transitory variety, mostly a consequence of the supply shock nature of the last recession. There are still things to worry about on the inflation front but sustaining current inflation rates is probably going to require an assist from the dollar. Inflation is, after all, a measure of purchasing power, i.e. the value of the dollar. In the last weak dollar period from 2002 to 2008, the annual rate of inflation exceeded the Fed’s 2% target for 5 consecutive years (2003-2008). By contrast, the generally strong dollar of the last decade kept CPI inflation under the Fed’s target almost the entire time. And the dollar, at least so far, is not cooperating with the big inflation narrative. The dollar is still near the bottom of its 6-year range but it refuses to fall any further.

Maybe it will eventually but in the short term, the dollar looks poised to resume the gentle uptrend it started at the beginning of the year. Global yields continue to favor the dollar and investors are taking advantage which should push the dollar up and inflation down.

And so, with CPI printing at 5% year over year what did bond yields do? Fell of course. What else would you expect from this strange market? But, as I’ve pointed out before, these are small moves and the trend for rates is, for now, still up:

The 10 year Treasury yield fell 10 basis points on the week and the yield is back to where it was in early March. I think a lot of what is going on here is nothing more than a consolidation of the gains from earlier this year. I don’t think this economic cycle is even close to over but the pace of change is not what the market was looking for. The COVID recovery is going to be a bumpy one with all kinds of twists and turns no one could have predicted.

The drop in nominal yields last week was not, however, matched by TIPS yields so the result was a drop in inflation expectations. We may have already seen the high:

Which brings us to that JOLTS report from last week. Job openings is the metric that usually gets the most attention in this report and the change in April was huge, up nearly 1,000,000 jobs from March to an all-time record. There are apparently plenty of jobs out there if some qualified person would just step up. And that may be part of the problem – not enough qualified applicants – but I think there is more going on here than the normal lament of a “skills mismatch”. There is also the matter of wages and there is at least anecdotal evidence that offering better pay will get you plenty of qualified applicants. There is also the small problem of very generous unemployment benefits that is keeping some portion of workers at home posting stupid tik tok videos.

But the rest of the JOLTS report offers another explanation that doesn’t involve accusing a large swath of Americans of laziness. The quits rate had a big jump too from 1.6% a year ago to 2.7% this year. Those are the numbers most of the news stories cited but that overstates the issue. People were not quitting jobs last April for pretty obvious reasons. The quits rate in February 2020 was 2.2% so the change to this year is about 22% which is still a stunning number if not quite as dramatic as the headlines. A high quits rate is seen as a sign of confidence. Workers don’t generally quit a job without having another one lined up or at least believing they can get one pretty easily.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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