A New Perspective
That was the strongest “weak” jobs report I’ve ever seen. While payroll jobs increased by “only” 210,000, far less than the 500,00 plus expected, the household survey reported job gains above 1.1 million, while the unemployment rate plunged, despite a surge in labor force participation. The economy is running very hot. Fed Chair Powell deep sixed the term “transitory” to describe inflation and it is very likely the Fed will announce an increase in the pace of tapering its bond buying at its upcoming meeting.
To put things into better perspective, 210,00 payroll jobs is roughly three times the underlying growth of the labor force. So, it was hardly weak. Rather, it was disappointing, since a much larger job gain was expected. But no one could have been disappointed with the lights out job increase reported in the household survey of 1.136 million. Moreover, the labor force participation rate surged by 0.2%, which added 594,000 people looking for work. These new job seekers were snapped up, plus another 542,00 previously unemployed, so the unemployment rate plummeted to 4.2%. The Fed’s latest forecast projected a 4.6% unemployment rate for December. Every other measure we have of the U.S. labor market is extremely strong, which is why (net) job growth of 500,000 was widely expected, but this report really lived up to that high expectation.
Policymakers at the Fed now have to re-evaluate the current policy approach. Several have already stated publicly that a faster reduction in bond buying is appropriate. We agree. Counting noses, we suspect Powell knows this is coming and has even suggested he supports it. If they double the monthly reduction in bond buying from $15 to $30 billion, they will complete the program by March instead of June. That will open the door to an earlier start to policy rate hikes. With inflation running hot, strong economic growth and some fiscal stimulus coming with more possibly on the way, it is long past time for the Fed to put its emergency bond buying program to bed.
This positive economic scenario can still be upended by Omicron. The little information we have suggests that Omicron may be more contagious than Delta, but less severe. And it appears that those already vaccinated have only mild cases of illness, at least so far. If the current vaccines provide some protection against Omicron, then boosting antibody levels with additional booster shots may be sufficient to bridge the period until new vaccines designed for Omicron become available. Once again, it appears that only the unvaccinated risk serious illness. But these are highly preliminary judgments based mostly on anecdotal reports. Firm conclusions are premature. Some early Omicron research results should become available within a few weeks. In the meantime, it appears that the pace of vaccinations has increased considerably, now running over 2 million per day over the past few days, which will be helpful no matter what the test results. It is doubtful that governments will require another round of shutdowns, but people may turn more cautious if Omicron proves to be more dangerous. By the same token, if Omicron produces milder illness, especially for those who are vaccinated, the reopening of the economy would likely continue. In any case, the Fed and the markets will have considerably more information long before the Fed completes its bond buying program.
Investors and the Fed are increasingly concerned about inflation, with the Fed now likely to reduce its bond buying more quickly. This will enable it to start hiking policy rates sooner. Surprisingly, bond yields have declined, which we judge to be unsustainable. And inflation is likely to remain higher than the Fed’s target for some time, as the labor market is quite tight and wage rates are rising more quickly. Since labor represents the largest cost in producing GDP, any moderation in inflation from reduced bottlenecks is likely to be limited. So, we favor companies with tangible assets and business models that benefit from inflation, and we are keeping our bond durations short.
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