Booming labor market puts ‘boomflation’ back on the map for investors

By Joy Wiltermuth

60/40 works again

Zip-zap. That’s how quickly Wall Street shelved fears of a sluggish economy and high inflation on Friday after a sizzling jobs report for July eclipsed worries of a shrinking U.S. economy in the edge of a recession.

The concern has instead turned to what a heartbreaking labor market and soaring costs for everything mean for stock and bond portfolios, particularly if it turns into a mix of growth and higher inflation with lasting resistance.

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

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

“Immediately, this directly challenges the view that the Fed is going to end up raising rates when it takes the key rate above 3%,” Engelke said by phone, adding that he suspects that the final target is now closer to 4%.

The surprisingly robust jobs report focuses on next Wednesday’s consumer price index update for July, with many on Wall Street hoping for signs that inflation may finally be peaking.

“It’s a good thing from a consumer perspective,” Yung-Yu Ma, chief investment strategist at BMO Wealth Management, said of the jobs report, adding that many households were struggling. . “Even with strong wage increases, average inflation has been higher,” he said.

“The challenge is that it makes it harder for the Fed to bring down inflation.”

60/40 works, again

The bottom doesn’t really feel like it’s falling out of the US economy, but assets from stocks to bonds to cryptocurrencies have all suffered nothing short of a bombardment in the first half of the year. ‘year. What happens next?

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

He also thinks recession fears have been a little overblown, especially with relatively strong second-quarter corporate earnings. “Stock markets saw this and held the line,” he said. “Everyone called it a bear market bounce. I haven’t been in that camp.”

Instead, Mullarkey said he’s bullish on both stocks and bonds, especially when you can get relatively low-risk exposure to the U.S. investment-grade corporate bond market at a yield of about 4.3%.

As short-term Treasury rates have “flew in circles,” he also appreciates the increased stability seen in 30-year yields near 3.065% on Friday.

“We like a balanced approach,” Ma said. ‘year.”

But Ma also said there would be “a very heavy focus” on Wednesday’s CPI reading for signs of recalcitrant inflation. “Especially in light of the jobs report, if both point to more sticky inflation, it’s possible the narrative will change, where the Fed will eventually have to raise interest rates.”

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

Read:July jobs number prompts traders to predict another Fed rate hike

A “neutral” rate of 3%

Higher wages may pinch corporate profits, though households are earning more to offset soaring prices for gas, groceries, cars and housing. A stronger labor market is easing recession fears. But the Federal Reserve’s inflation fight has become more difficult.

What if it boils down to some level of tolerable boomflation in the United States, given all the strings pulled by the government during the pandemic to keep households from losing their homes and to keep the economy from collapsing in a deep and long recession?

“It really comes down to the question of whether the world can live on 5% wage increases,” Mullarkey said, adding that a lot of the wage gains were for low-income workers. “It could be a healthy catch-up that is deserved.”

Regarding labor shortages, he also said it was not accurate to blame older workers who have retired. “We’re missing 2 million workers who would have come from overseas,” Mullarkey said, pointing to immigration restrictions put in place under the previous administration. “It put a dent in our workforce.”

Another approach could be for the Fed to consider abandoning its idea that a 2% annual inflation rate is a “neutral” target.

“What looks like a commitment from the Fed to hit 2% inflation is a tough number to hit,” BMO’s Ma said, adding that it also risks the central bank “tightening too tightly, seeing no way easy to lower inflation other than the slowdown”. the economy more than people would probably like to see it slow down.”

On the other hand, from an economic and market point of view, “it’s good to have a bit higher range of 2% to 3% because of the sticker points of inflation and tight labor market,” he said. “There is nothing magical about 2%.”

Although he doesn’t think the mood at the Fed is still there.

Other economic data available for the week ahead are the New York Fed’s 3-year inflation expectations, followed by the NFIB Small Business Index on Tuesday. Next is Wednesday’s important CPI indicator for July and Friday’s consumer sentiment reading.

U.S. stocks closed weakly on Friday, with the Dow Jones Industrial Average up 0.2% but with a weekly loss of 0.1%, according to Dow Jones Market Data. The S&P 500 and Nasdaq Composite posted weekly gains of 0.4% and 2.2%, respectively, both marking a third straight week of gains and their best streak since April 1.

Related: ‘One of the Strongest Labor Markets of the Last 50 Years’: Looking for a raise? This jobs report has good news for you

-Joy Wiltermuth

 

(END) Dow Jones Newswire

08-06-22 0956ET

Copyright (c) 2022 Dow Jones & Company, Inc.

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