Job Report Recap

As I celebrated ‘Merica Day, I pondered the World Cup and soccer in the States.  The games have been great this year, perhaps the best I can remember.  And I’m more interested than usual despite our own team missing out.  But soccer is not going to catch on here.  These players are ridiculous.  I know it’s cool right now to claim to be a soccer fan, but I can’t root for these guys writhing around on the ground like a sniper picked them off with a .50 caliber M82A1.  I saw two guys gently bump heads going for a header and both rolled around like Tank Abbott had just connected a haymaker.  On Saturday, my ten year old connected a line drive wiffle ball to my forehead that would have hospitalized Neymar.

Football players play with broken bones all the time.  Hockey players take slap shots to the face that knock out a dozen teeth and don’t miss a shift.  Heck, even our golfers can win the US Open on a broken leg and torn ACL.  Soccer players don’t even touch each other but the whiff of air generated by the near miss cause them to scream so loud I can hear it on TV.  Yeah, soccer’s not catching on here no matter how hip it is right now to pretend to know which player returns to Man U after their team exits.  I enjoy the games, but not the absurd acting – God Bless ‘Merica.

Last Week This Morning

• The 10T continued its slide, closing Friday at 2.824%
  • German bund closed at 0.29%
• 2 year Treasury opened at 2.54%
• Yield curve steepness is now just 0.28%
  • I’ll stop complaining now, obviously it doesn’t matter
• LIBOR at 2.10%
• SOFR at 1.97%
• Minutes from the most recent FOMC meeting suggested an upbeat outlook on the economy, gradual hikes, and an acknowledgement of downside risks from tariffs
• Tariffs on Chinese goods officially went into effect Friday, as did China’s retaliatory measures.

FOMC Minutes

Generally, a very upbeat Fed that suggests the Fed intends to hike two more times this year.

• Economy is “very strong”
• Appropriate to raise rates at a level “at or somewhat above their estimates of its longer-run level by 2019 or 2020”
• Inflation expected to run at 2% on a “sustained” basis
• “most” members noted that “uncertainty and risks associated with trade policy had intensified”

But maybe…the Fed is finally paying attention to the flatness of the yield curve!

• A “number” of Committee members believe its “important to continue to monitor the slope of the yield curve, given the historical regularity that an inverted yield curve has indicated an increased risk of recession in the United States.”
• This was at least partially offset by “some” participants noting this time could be different (which always works out well, right?) due to factors such as lower neutral rate, lower long term inflation expectations, lower term premiums, and QE.

I feel like an “injured” soccer player, flailing about on the ground and screaming about my flat yield curve getting stomped on.  Someone bring me a stretcher and some of that magic spray to make it all better.  Or should I just stop whining and get back in the game?

Bottom Line – tariffs and yield curve flatness are the two biggest near term constraints that would cause the Fed to hike slower than expected; otherwise, the Fed is intent on hiking at a gradual pace.

Our Best Guess – we believe that the Fed will hike to 2.75%-ish and will conclude this tightening cycle sometime in the first half of 2019.  Financial conditions are tightening and economists are projecting a slowing GDP in 2019 and 2020.

Jobs Report

Unlike last month, Friday’s job report was a bit of a surprise because Trump didn’t tip us off with a teaser tweet a few hours before the release…probably because the unemployment rate ticked back up to 4.0%.  Had he bothered to read the fine print, he would have seen that this increase was only because the participation rate ticked higher – that’s a good thing.  It means optimism led to more unemployed workers seeking out positions.

Another strong report, with the economy adding 213k jobs vs the forecasted consensus of 195k.  Additionally, April and May were revised higher by a combined 37k.  Post-revisions, the three month average is 211k.   Here’s a review of quarterly averages since the start of 2017.

Q1 2017          177k

Q2 2017          190k

Q3 2017          142k

Q4 2017          221k

Q1 2018          218k

Q2 2018          211k

Takeaway #1 – pretty strong, right?

Takeaway #1 – have we already peaked?

Last week’s newsletter addressed the declining GDP consensus forecasts for 2019 and 2020.  If we start seeing the job growth slow, it may confirm those concerns.

This would also tie in nicely with our belief that the FOMC is bent on hiking now while the economy is still strong, but will then halt in the face of softening data at some point over the next year or so.

Perhaps the only disappointing aspect of the job report was the average hourly earnings once again missing expectations, coming in at 2.7% y/y vs forecasted 2.8%.

This remains the one aspect of the job market confounding the Fed.  How can we be at full employment without any upward pressure on wages?

This Week

Lots of Fed-speak this week, with an increased emphasis on any discussion of trade policy risks.  The Fed needs to acknowledge these risks or lose credibility in the eyes of the market.

We also get some inflation data as well, with PPI and CPI on Wednesday and Thursday.

Otherwise, as usual just keep an eye on the WH for clues about the direction of rates.  I personally find it reassuring to have such a calm and steadying hand in the West Wing to navigate the murky waters of a potential trade war with China.  And thank goodness we aren’t simultaneously dealing with a major geopolitical risk since, “There is no longer a Nuclear Threat from North Korea” (6/13/18).