We’ve written before that the Federal Reserve has a dual mandate: maximum employment and stable prices. We’ve spent multiple weeks discussing the inflation side, including CPI, PPI, headline, core, etc. This makes sense, as it is the focus of financial markets at the moment.
However, the other piece of the dual mandate was in complete focus this week, with job reports taking center stage. But before we get to the numbers, let’s explain why these numbers are just as important.
First and most obvious, if the economy continues to create jobs at a robust pace, this bodes well for anyone looking for work. Job growth creates opportunities to earn, and when people earn, they tend to spend, and the growth cycle continues. Moreover, you just don’t see recessions during periods of sustained job growth.
Second, and likely less obvious, is that the Fed, while highly focused on the inflation battle, is also keenly watching the labor market. Take a look at the quote from Chair Powell’s prepared remarks two weeks ago:
“The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably down toward 2 percent. Of course, we’re committed to both sides of our dual mandate, and an unexpected weakening in the labor market could also warrant a policy response.“
Most people focus on the first sentence. The Fed will hold rates steady until it is confident that inflation is moving in the right direction. Check. However, they gave themselves an out by referencing their dual mandate. If the labor market starts to crack, even if inflation is not where the Fed wants it to be, that could warrant a reduction in the target interest rate.
This is important. Introducing that language clearly indicates that the Fed’s focus is not myopic. That said, the jobs reports this week showed no signs of weakening. In fact, all four of the key jobs reports came in better than the consensus:
- JOLTs Job Openings: 8.756M vs. 8.748M vs. 8.750M
- ADP Employment Change: 184K vs. 155K vs. 148K
- Non Farm Paryolls: 303K vs. 270K vs. 200K
- Unemployment Rate: 3.8% vs. 3.9% vs. 3.9%
(Actual vs. Last Month vs. Consensus)
It should be pretty clear that the Fed will not be cutting rates based on the numbers above. That means without a significant slowing on the employment front or sustained downward pressure on inflation, we are likely to see rates stay higher for longer, which could put some pressure on stocks and bonds. Only time will tell, but good news: We’ll get fresh inflation data next week to throw in the mix.
On a completely different note, if you happen to be on the path of the total solar eclipse on Monday, enjoy it; it doesn’t happen often. In Ohio, this will be our first total eclipse since 1806, and it won’t happen again until 2099.
Economy
- It was a volatile week, with jobs reports scattered throughout. The S&P 500 was down -1.0%, the Nasdaq was down -0.8%, and the small-cap Russell 2000 was down -2.9%.
- The S&P Global U.S. Services PMI eased to 51.7 in March, from 52.3 in the previous month, in line with preliminary estimates.
- The ISM Services PMI in the U.S. fell to 51.4 in March from 52.6 last month and below forecasts of 52.7. The reading pointed to the weakest growth in the services sector in three months.
- Average hourly earnings for all employees on U.S. private nonfarm payrolls increased by 4.1% YoY in March, following a 4.3% advance in the prior month and also matching market estimates.
Stocks
- U.S. equities were in negative territory. Healthcare and Real Estate led the decline, while Energy and Communication Services outperformed. Growth stocks led value stocks, and large caps beat small caps.
- International equities closed lower for the week. Emerging markets fared better than developed markets.
Bonds
- The 10-year Treasury bond yield increased 17 basis points to 4.38% during the week.
- Global bond markets were in negative territory this week.
- High-yield bonds led for the week, followed by corporate bonds and government bonds.
