| Uri Greenfeld, Chief Strategist of Psagot Investment House
The March report may have missed a bit in relation to expectations but overall it continues the positive trend of the US labor market in recent months. In other words, made a 360% change.
The question of the labor market remains the same – how structural is the shortage of workers, ie the pressure to increase wages is not expected to disappear, and how cyclical, ie it is only a matter of time before workers return to look for work and wage increases calm down?
The answer to this mystery will ultimately determine how much the Fed will have to continue to raise interest rates even while slowing down and is therefore critical. To the chagrin of Powell and his friends, as well as to our chagrin, the March employment report did not bring us closer to the answer not even in inches.
| Highlights from the report:
The American economy added 431 thousand in March, compared to the expected increase of 490 thousand jobs. Although the bottom line is a little less good than expected, there is no cause for concern so far. First, January and February data were updated upwards in 95,000 jobs. Second, after the updates, the average monthly job increase in the first quarter stands at 562,000, an average similar to that of the entire 2021 year.
According to the employers’ report, there are still 1.6 million workers missing in the economy compared to the situation in February 2020. In contrast, according to the household report, only 408,000 report that they have not returned to work compared to the situation before the corona. The gap between the two reports continues to be exceptional and contains within it the mystery of the Corona’s impact on the long-term labor market.
Continuing on the upside, the household report continues to be stronger and showed an addition of 736,000 new workers. As a result, the rate decreased by 0.2% to 3.6%, while increasing by 0.1% in the labor force participation rate to 62.4%.
Rose by 0.4% in March and brought the annual rate of change in it to rise to 5.6%. Unless there are noisy surprises by then, the acceleration in the rate of salary change gives Fed final approval to raise the next meeting by 50 bps.
At the same time, it is worth noting that the monthly increase in wages in the last two months (0.1% and 0.4%) is slower than in the previous months. Therefore, even if wages continue to rise at a similar rate, in the coming months the annual growth rate is expected to start slowing.
The bottom line, despite rising wages, continues to make names in the real income of the American consumer and the Fed can not help but react. Weekly real wages have fallen faster in the last 12 months than in the 2008 crisis. The data on private income and expenditure published last week also paint the same picture.
Although it rose by 0.5% in February and private expenditure rose by 0.4%, which on the face of it looks excellent, but in real terms the numbers are completely different, with real income falling by 0.2% and spending by 0.4%. The situation of the consumer is even more problematic because there are of course expenses that the consumer can not reduce, especially in services like health and housing.
Thus, while real expenditure on services rose by 0.6% in February, real expenditure on goods fell by 2.1%. Yes, in one month! Therefore, there is no reason to be surprised that the forwards on the Fed interest rate are pricing on the one hand another 9 interest rate increases of 0.25 basis points this year (!) But also between 2 and 3 interest rate reductions next year.
| Markets are pricing a move of acceleration and curbing interest rates
Forward interest embedded bond
Source: Bloomberg
| The slope of the curve is reversed again
The employment data and their significance have led the yield curve slope in the inter-two-year period to become negative again, for the second time during the past week. In a way that is anything but coincidental, the Fed published a work 9 days ago entitled “Do not be afraid of the yield curve” and it came to explain to the investing public that the reversal of the yield curve is not necessarily a sign of recession but may be due to other reasons.
Of course, history shows us that this is no less silly when not only in the last 70 years every time the curve was overturned there was a recession (except in the mid-90s when the huge investments in internet infrastructure managed to prevent a recession) but also every time the curve is overturned Says there’s nothing to panic about (Bernanke’s “This time it’s different” speech in 2006, for example) and eats a hat after that.
The truth is that what’s really amazing is that the same writers who published the study last week, published the original article in 2018 and even then they were probably wrong.
True, the recession eventually came in the wake of the Corona but:
- The Fed started lowering interest rates even before the corona
- Even without the Corona the U.S. economy would probably have entered a recession in 2021.
Therefore, the bottom line is that it is hard to argue with market behavior that has been consistently going on for so long. The rollover curve is the best indicator of a recession in the making and although it is problematic in terms of timing (24-12 months ahead of the recession), it is excellent in terms of end result. By the way, the reversal of the curve also corresponds to the macro data that are already published today and are preliminary indicators of economic activity.
For example, the gap between the part of the index of the conference board that refers to forward expectations and the part of the same index that relates to the current situation continues to decline sharply and shows that consumers also smell bad in their situation in the not too distant future.
As can be seen in the graph below, the correlation between this expectation gap and the slope of the curve is very strong and it is difficult to dismiss the curve reversal in “trade distortions” as the Fed tends to argue.
| The curve of the curve describes the feelings of the American consumer
Source: Bloomberg
So what do you do when the curve is turned upside down? Running away from the market before the recession arrives? Really not sure. Deutsche published an interesting work last week according to which the reaction of the markets () was very different in the period before the 80s and the one after them.
So, the interesting question is are we in a period of return to inflation and high interest rates like in the 70s and 80s?
In our estimation, since much of the current inflation is due to supply factors and is expected to fade towards the end of the year and because the deflationary structural factors (mainly demographics) that characterized the last 20 years have not yet disappeared, the answer is no.
The writer is the chief strategist of Psagot Investment House and has no personal interest in the review. This review is not a substitute for investment marketing that takes into account the data and special needs of each person.