This week we received the latest monthly payrolls data. US employers added 209K jobs – a little lower than expected. However, the job market appears robust. One metric that deserves closer inspection are weekly hours worked. That is trending lower and could be a precursor to what’s ahead. From my perspective, what we’re seeing is the “Fed lag” effect of higher rates slowly tighten its vice. But these things take time and we may not see the full effects on the labor market for another 6-12 months (at a guess).
‘Higher for Longer’ after May Core PCE
May’s print for Core PCE came in 4.6% YoY – still well above the Fed’s objective of 2.0%. However, mainstream were quick to label the report as ‘lackluster’. Why? Here’s the thing – Core PCE has hardly changed the past few months. It dipped in May to 4.62%, from April (4.68%), but was above March (4.61%), and was exactly where it had been in December (4.62%). Put another way – we have made no ground since December – and yet it was now somehow ‘lackluster’. But it gets better: core services inflation (without energy services) rose by 5.4% in May YoY. It was fractionally lower than April (5.5%) – but equal to what we see in both March and December (5.4%). Similar to Core PCE – it too is stuck in a tight range for 5 consecutive months. What does all this mean? Simple: rates will be higher for longer and markets don’t get it.
Why Is it Different This Time?
Whenever history looks like repeating – it’s worth asking what’s different this time? I say that because the past is never a guarantee of what’s ahead. Put another way, if you are making decisions on that basis, you might be suffering from “confirmation bias”. And that can be a blind spot. My (possible) blind spot is I think a recession is more than likely within the next 12 months. As such, I am only willing to put about 65% of my portfolio in risk assets. If I felt a recession was not likely – I would meaningfully increase my exposure. My bias is to lean into historical data (and leading indicators) which have reliably predicted recessions in the past. That feels logical. But I could be wrong.
Skip, Pause, Hike or Pivot
It’s Fed week. What will the world’s most watched central bank do? A surprise hike like Canada and Australia? Unlikely. Maybe time to hit the pause button and take a look around? That’s what markets are pricing in. Or will this be a ‘hawkish skip’ implying their work is not yet done? From mine, if we see Core CPI anything above 5.0% this week – the Fed will tell us their work is not done. Here’s the thing: markets are trading back at levels before the Fed commenced their 500 bps of rate hikes. What’s more, we find Core PCE still above 5.0%; unemployment well below 4.0%; and wage inflation above 4.0%? What is to stop the Fed from finishing the job? Whilst they are likely to pause – there are more hikes ahead
For a full list of posts from 2017…