Morning Report: Strong jobs report

Posted on June 2, 2023 by Brent Nyitray

Vital Statistics:

Stocks are higher this morning after a good jobs report. Bonds and MBS are down.

The economy added 339,000 jobs in May, according to the Employment Situation Report. This was way bigger than the 190,000 the Street was looking for. Strangely, the unemployment rate ticked up from 3.4% to 3.7%, which was driven by a 310,000 decrease in the number of people employed. Seems odd.

Average hourly earnings rose by 0.3% MOM and 4.3% YOY. Wage inflation continues to decelerate, which is the Fed’s primary focus for inflation:

So, we saw in the ISM report that supply chain issues are done, and commodity price inflation is largely over. Home prices peaked a year ago, so this component of inflation is about to fade, though rents tend to lag home prices by about 21 months on average. And wage inflation continues to work its way lower. The Fed Funds futures are still leaning towards a pause at the FOMC meeting in a couple of weeks.

St. Louis Fed President James Bullard released a piece yesterday where he compared the current Fed Funds rate against the suggested rate using the Taylor Rule, which has been a widely-used model for monetary policy over the past 30 years. According to this model, which gives a range of rates, the Fed Funds rate is back in the range after a long time below it. Monetary policy was too tight in early 2019, and the Fed began easing in late 2019. It was correct afterward until late 2021, when the Fed got behind the curve.

“While both headline and core PCE inflation have declined from their peaks in 2022, they remain too high. An encouraging sign that inflation will decline to 2% comes from market-based inflation expectations, which had moved higher in the last two years but have now returned to levels consistent with the 2% inflation target. The prospects for continued disinflation are good but not guaranteed, and continued vigilance is required.”

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