The roaring job market puts “boom inflation” back on the investor map

Instead, concern has shifted to what a booming labor market and rising costs for everything means for stocks and bond portfolios, particularly if it morphs into a resilient mix of higher growth and inflation.

How to call such a scenario? “Boomflation,” said Kent Engelke, chief economic strategist at Capitol Securities Management, indicating that annual wage increases set at 5.2% on Friday should help fuel growth.

On the darker side, however, inflation is at a 41-year high in June, which may be even more difficult to tame after more workers left the labor pool in July.

“In the immediate term, this directly challenges the idea that the Fed will raise rates when it reaches the policy rate above 3%,” Engelke said over the phone, adding that he suspects the ultimate target is now closer. to 4%.

The surprisingly solid employment report puts more focus on next Wednesday’s CPI update for July, with many on Wall Street hoping for signs that inflation could finally peak.

“It’s good from a consumer perspective,” said Yung-Yu Ma, chief investment strategist at BMO Wealth Management’s job report, adding that many families have struggled. “Even with strong wage increases, inflation has been higher on average,” she said.

“The challenge is that it makes the Fed’s job of reducing inflation more difficult.”

60/40 still works

The fund doesn’t really look like it’s falling out of the US economy, but assets, from stocks to bonds to cryptocurrencies, all took a bombardment in the first half of the year. What happens next?

“Stagflation fears, that kind of fall,” said Dec Mullarkey, managing director of investment strategy and asset allocation at SLC Management.

He also believes that recession concerns have been a bit exaggerated, particularly with relatively strong second-quarter corporate earnings. “The stock markets saw that and held the line,” she said. “Everyone called it a bear market rebound. I have not been in that field ”.

Instead, Mullarkey said he is bullish on both stocks and bonds, particularly when relatively low risk exposure to the US investment grade corporate bond market can be gained with a yield of around 4.3%.

Although short-term Treasury rates have been “rambling”, he also likes the greater stability seen in 30-year TMUBMUSD30Y yields.
3.072%
close to 3.065% on Friday.

“We like a balanced approach,” said Ma of BMO. “To the extent that there may be more challenges in equities, fixed income provides more support than in the first half of the year.”

But Ma also said there will be “huge, huge focus” on Wednesday’s CPI reading for signs of recalcitrant inflation. “Especially in light of the employment report, if both point to stickier inflation, the narrative may change, and eventually the Fed will have to raise interest rates.”

The Fed’s aggressive rate hikes since March have already pushed the federal funds rate to a range of 2.25% to 2.5%, with further jumbo rate hikes likely.

Laws: The July job count has traders pencil in another huge Fed rate hike

A “neutral” rate of 3%.

Higher wages can pinch corporate profits, although households earn more to compensate for rising prices for gas, groceries, cars and housing. A stronger labor market eases recession fears. But the Federal Reserve’s fight against inflation just got tougher.

What if it boils down to a certain level of boomflation is it tolerable in the United States, given all the strings the government pulled during the pandemic to prevent families from losing their homes and to prevent the economy from crashing into a deep and long recession?

“It really comes back to, can the world live on 5% wage increases,” Mullarkey said, adding that much of the wage increases were for lower-income workers. “It could be a healthy recovery that’s deserved.”

On the shortage of workers, he also said that it is incorrect to blame older workers who have retired. “We are short of 2 million workers who would have come from overseas,” Mullarkey said, pointing to immigration restrictions introduced during the past administration. “This has created a hole in our workforce.”

Another approach could be for the Fed to consider abandoning its notion that an inflation rate of 2% per annum is a “neutral” target.

“What sounds like a Fed commitment to hit 2% inflation is a hard number to reach,” Ma told BMO, adding that it also risks the central bank “tightening up too much, not seeing an easy way to lower. inflation if not slowing the economy more than people would probably want to see it slow. “

On the other hand, from an economic and market point of view, “it’s okay to have a slightly higher range of 2% to 3% due to the inflation benchmarks and the rigidity of the labor market”, he said. “There is nothing magical about 2%.”

Even if he doesn’t think the Fed mentality is still there.

Other economic data available for next week is the New York Fed’s 3-year inflation expectations, followed on Tuesday by the NFIB small business index. So it’s Wednesday’s important CPI indicator for July and Friday’s consumer sentiment reading.

US equities closed mixed Friday, with the Dow Jones Industrial Average DJIA,
+ 0.23%
up 0.2%, but with a weekly loss of 0.1%, according to Dow Jones Market Data. The S&P 500 SPX Index,
-0.16%
and Nasdaq Composite COMP,
-0.50%
it posted weekly gains of 0.4% and 2.2%, respectively, both marking the third consecutive week of earnings and their best stretch since April 1.

Related: ‘One of the strongest job markets of the last 50 years’: Are you looking for a pay raise? This employment relationship has good news for you.

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