Markets Care More About Inflation Than Job Gains
(Bloomberg Opinion) -- Despite a jobs report that showed a much-better-than-expected addition of 678,000 nonfarm jobs last month — bringing the nation ever closer to pre-pandemic levels — there were no fireworks on Wall Street Friday morning. In fact, the report, which showed the best gains since July, landed with a thud.
The S&P 500 Index fell for the fourth time in the past five days, and the bond market continued to signal a growing risk of recession. Meanwhile, many American workers are finding it harder to put food on the table, even with the low 3.8% unemployment rate.
That’s because the dominant economic issue in America is inflation and what will happen as policy makers try to deal with it. Economists surveyed by Bloomberg expect consumer prices to rise at a 7.9% annual pace in next week’s consumer price index report, a new 40-year high, as Russia’s invasion of Ukraine drives up global energy prices and adds more fuel to the CPI fire. Housing prices have continued to soar; supply chain bottlenecks have persisted; and demand for many types of consumer goods has outstripped inventories. The playbook for inflation is no secret: The Federal Reserve will have to raise interest rates at a series of coming meetings, as Chair Jerome Powell supported doing in his testimony before Congress this week. The jobs report did nothing to give the central bank any pause.
All of this, of course, is of particular concern to American workers, who are already paying the price for this inflation. Average hourly earnings growth decelerated to a 5.1% annual pace — a strong clip in normal times but less impressive when compared with the accelerating 7.5% inflation rate. The specifics depend on the type of jobs people have and whether they own or rent their homes, but that’s a net loss for many of the U.S.’s most vulnerable residents.
But as policy makers ostensibly come to the rescue, Americans should be prepared for the possibility that their economic circumstances may get worse before they get better.
The market is increasingly suggesting that the Fed will be unable to constrain inflation without tipping the economy into a recession. The gap between two-year and 10-year Treasury yields — a rough proxy for the steepness of the so-called yield curve — narrowed further on Friday after shrinking about 0.33 percentage point in the past month. That’s often a sign, however imperfect, that traders are anticipating a recession. The thinking is that short-term rates rise in reaction to the Fed’s policy, but markets worry that the central bank will overcorrect, sink the economy and eventually have to reverse course. Longer-term rates briefly dip below the short-term ones.
Financial markets often appear illogical to outside observers: Good news is so often bad news, and vice versa. Some of that is because markets are supposed to assimilate the future in their imperfect way, and backward-looking data just doesn’t move the needle. Even still, sometimes good news is just good news, and maybe this is one of those cases. The U.S. has recovered some 19.9 million jobs since April 2020, with only 2.1 million to go to get to the pre-pandemic peak.
Recession isn’t the most likely outcome, and it’s important to remember that even as the world feels as if it’s on fire. Economists surveyed by Bloomberg think the U.S. economy will grow 3.7% this year, and analysts continue to project strong corporate earnings. But markets clearly think the probably of a downturn is growing regardless of the good news headline from the jobs report.
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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Jonathan Levin has worked as a Bloomberg journalist in Latin America and the U.S., covering finance, markets and M&A. Most recently, he has served as the company's Miami bureau chief. He is a CFA charterholder.
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