Unemployment or Inflation? | May 4, 2018

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For much of the last decade the focus has been squarely on unemployment and this past Friday was no different… Or was it?

Unemployment was released this past Friday and delighted investors with a headline rate at 3.9%. Also impressive was the fact that the U6 rate (measuring under and unemployment) had fallen below 8%, coming in at 7.8%. Markets rallied on Friday with the positive jobs data. There was some underlying weakness however. Job creation missed estimates, and wage growth was meager. If job creation missed estimates, how did the unemployment rate fall to 3.9%? Great question. It was due to weaker participation, as the rate fell from 62.9% to 62.8%.

Inflation concerns also subsided last Friday. Earlier in the week, core personal consumption expenditures (PCE) came in just under the Federal Reserve Board (FRB) target of 2% at 1.9%. Late in the week, ebbing concerns over inflation were supported by lack luster wage growth of 0.1% for April. There was promise last week on the tariff (inflation) front as well, as negotiations with China seemed to make some headway and President Trump extended the deadline for steel and aluminum tariff exemptions. Also curbing concerns about a steeper path for the FRB, was their statement last week that inflation is a symmetrical target. Meaning that since it has hovered just below 2%, they would also be okay with it hovering just above 2% (for a little while).

The questions being, was the response by the markets on Friday the result of the jobs report or easing concerns over inflation? For the last nine years people have been looking to the jobs report as the indicator of FRB policy. It appears that there is a changing of the guard. As we approach (or reach) full employment, the narrative has shifted to the other FRB mandate, which is to keep inflation contained. The correction that begun at the end of January was born out of this very issue.


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