A bustling job market is putting “booming inflation” back on the map for investors

Instead, the concern has shifted to what a crowded job market and higher costs of everything mean for stocks and bond portfolios, especially if they turn into a combination of higher growth and inflation with staying power.

What do we call such a scenario? “Boomflation,” said Kent Engelk, chief economist at Capitol Securities Management, pointing to the 5.2%-fixed annual wage gain on Friday, which should help boost growth.

On the grim side, though, inflation stands at a 41-year high as of June, which may be hard to tame after more workers pulled out in July from the labor pool.

“In the near term, this directly challenges the view that the Fed will increase rates when the policy rate is above 3%,” Engelke said by phone, adding that he doubted the end target was now close to 4%.

The surprisingly strong jobs report puts the spotlight on next Wednesday’s CPI update for July, with many on Wall Street hoping for signs that inflation has finally peaked.

“It’s a good thing from a consumer perspective,” Yung-Yu Ma, senior investment analyst at BMO Wealth Management told the jobs report, adding that many households are struggling. “Even with the strong wage gains, the inflation rate was higher on average,” he said.

“The challenge is that it makes the Fed’s job of lowering inflation more difficult.”

60/40 works again

The bottom doesn’t look like it’s coming out of the US economy, but assets, from stocks to bonds to cryptocurrencies, all took on something less than chance in the first half of the year. what happened after that?

“Stagflation fears, that’s kind of a fall,” said Des Molarque, managing director of investment strategy and asset allocation at SLC Management.

He also believes that recession fears were a bit exaggerated, particularly with corporate earnings in the second quarter that came in relatively strong. “Stock markets have seen this, and they have held on,” he said. “Everyone was calling this a bear market bounce. I wasn’t in that camp.”

Instead, Mularkey said he’s bullish on both stocks and bonds, especially when you can take relatively low risk in the investment-grade US corporate bond market with a yield of about 4.3%.

While short-term treasury rates have been “swinging”, he also likes the increased stability seen in the 30-year TMUBMUSD30Y returns,
3.072%
Close to 3.065% on Friday.

“We love the balanced approach,” said BMO’s Ma. “To the extent there could be more challenges in equities, fixed income is providing more support than it was in the first half of the year.”

But what also said there will be “very heavy focus” on Wednesday’s CPI reading for signs of stubborn inflation. “Especially in light of the jobs report, if both indicate that inflation is more difficult, the narrative is likely to change, as the Fed will eventually have to raise rates.”

The Fed’s aggressive rate hikes since March have already pushed the fed funds rate into the 2.25% to 2.5% range, with more massive rate hikes now likely.

Read: July jobs numbers make traders plan another jumbo Fed rate hike

3% “Neutral” rate

Higher wages can reduce corporate profits, even though households earn more to offset higher prices for gas, groceries, cars and housing. A stronger labor market eases recession fears. But the Fed’s fight against inflation is getting tougher.

What if it drops to a certain level of high inflation that can be tolerated in the United States, given all the restrictions the government has tightened during the pandemic to prevent families from losing their homes and to keep the economy from collapsing into a deep and long recession?

“It really comes down to, can the world live on 5% wage increases,” Mularkey said, adding that a lot of the wage gains were for lower-income workers. “That could be a well-deserved health compensation.”

Regarding the labor shortage, he also said that it is not accurate to blame older workers who have retired. “We have 2 million workers that would have come from abroad,” Mularkey said, referring to immigration restrictions that were put in place under the previous administration. “This put a hole in our workforce.”

Another approach might be for the Fed to consider dropping its idea that 2% annual inflation is a “neutral” target.

“What looks like the Fed’s commitment to reach 2% inflation is a hard number to come by,” BMO’s Ma said, adding that it also risks “striking the central bank, by seeing that there is no easy way to bring down inflation other than slowing down.” More than people would like to see it slow down.”

On the other hand, from an economic and markets point of view, “It’s good to have a slightly higher range of 2% to 3% because of the label points for inflation and labor market tightness,” he said. “There is nothing magical about 2%.”

Although he doesn’t think the mentality, at the Fed, is there yet.

Other economic data for the coming week will be the 3-year inflation outlook for the New York Federal Reserve, followed on Tuesday by the NFIB Small Business Index. Then the important CPI metric is considered Wednesday for July, and the consumer confidence reading for Friday.

US stocks closed mixed on Friday, with the Dow Jones Industrial Average, the Dow Jones Industrial Average,
+ 0.23%
It rose 0.2%, but with a weekly loss of 0.1%, according to market data from Dow Jones. S&P 500 SPX Index,
-0.16%
and Nasdaq Compound,
-0.50%
Both posted weekly gains of 0.4% and 2.2%, respectively, and both posted their third consecutive week of gains and their best extension since April 1st.

RelatedOne of the strongest labor markets of the last 50 years: Looking for a wage increase? This jobs report has good news for you.

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