Strong employment --> yields rise

Investment Analysis Clubs Macro Economic Trends and Risks
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https://www.wsj.com/articles/march-jobs-report-keeps-fed-on-…

**March Jobs Report Keeps Fed on Track for Larger Rate Rise in May**
**Strong hiring could sustain fears of an overheating economy**
**By Nick Timiraos, The Wall Street Journal, Updated April 1, 2022**

**Friday’s employment figures underscore the urgency Federal Reserve officials feel to quickly withdraw economic stimulus by raising interest rates in potentially larger intervals in the coming months.**

**Employers added 431,000 jobs in March, the Labor Department reported on Friday, and the unemployment rate fell to 3.6% from 3.8% in February. Hiring during the first two months of the year was stronger than initially reported, leaving average monthly hiring at 562,000 jobs so far this year, in line with last year’s booming pace of job gains....**

**In the two weeks since they last met, many Fed officials have indicated they could support raising rates by a half percentage point instead of the traditional quarter point at their coming meeting, May 3 to May 4. Mr. Powell has indicated that the Fed is also likely to finalize plans at that meeting to start shrinking the central bank’s $9 trillion asset portfolio....** [end quote]

This is a combination of rising interest rates at short durations and monetary tightening at longer durations (Quantitative Tightening). The Treasury yield curve is already flat at higher durations. The 10Year-2Year spread just went negative, often a signal of approaching recession.

https://stockcharts.com/freecharts/yieldcurve.php
https://fred.stlouisfed.org/series/T10Y2Y

Owners of bonds and (especially) bond funds need to be aware of the way duration affects the value of bonds.

https://www.investopedia.com/terms/i/interest-rate-sensitivi…

**Fixed-income securities and interest rates are inversely correlated. Therefore, as interest rates rise, prices of fixed-income securities tend to fall. When applied to calculate fixed income securities, interest rate sensitivity is known as the asset's duration. This is one way to determine how interest rates affect a fixed-income security portfolio. The higher a bond or bond fund's duration, the more sensitive the bond or bond fund to changes in interest rates.** [end quote]

Many METARs feel that bonds are beneath their notice and that stocks are a superior investment. But the bond market is larger than the stock market and usually far less volatile.

I have laddered bonds and CDs for many years. When they mature, the cash is available for re-investment. For the past couple of years, with yields so low, I chose to hold cash rather than reinvest. The WSJ says that banks are not likely to increase their (very minimal) interest rates anytime soon, so I have been shopping among high-rated corporate and Treasury debt. Short-term duration (less than 2 years) since I expect rates to rise in that time frame.

I also own stocks. But the stock market is in a bubble and vulnerable to much larger drawdowns than the bond market.
https://www.multpl.com/shiller-pe

Wendy

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Thank you for recommending this post to our Best of feature.

…

March Jobs Report Keeps Fed on Track for Larger Rate Rise in May
Strong hiring could sustain fears of an overheating economy
By Nick Timiraos, The Wall Street Journal, Updated April 1, 2022

Friday’s employment figures underscore the urgency Federal Reserve officials feel to quickly withdraw economic stimulus by raising interest rates in potentially larger intervals in the coming months.

Commentary on BNN that if the US could fix childcare there would be no stopping the economy. Of course a lot of the women that were working from home have now been “allowed to return to the office”. The banker kid got a kick out of the terminology but some of her staff quit when told they would be “allowed to return to the office”.

She accepted an offer from a large US bank that is far more focused on Corporate Loans than her Canadian big five bank is but she has to spend 90 days not working for anyone (though still getting paid by the Canadian Bank) due to the non-compete rules. It sounds like she got a really nice raise as well but thinks she might have left something on the table as her dad suggested to her.

Anymouse <has Father’s Day, a really significant high numbered birthday and Xmas to get more stuff!>

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I bet my bank will find a way to raise mortgage rates to 5 percent or higher while continuing to pay me zero on savings.

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I bet my bank will find a way to raise mortgage rates to 5 percent or higher while continuing to pay me zero on savings.

They’d pay you more on your money if you gave it to them for 30 years. :slight_smile:

DB2

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Thank you for recommending this post to our Best of feature.

I bet my bank will find a way to raise mortgage rates to 5 percent or higher while continuing to pay me zero on savings.

Traditionally banks perform better than the market during inflationary conditions. I own three of ours that are literally ‘money in the bank’.

OT - Just watched one of those ads (paid for by Pharma) about how controlling prices would cause this mom to lose her son because they wouldn’t be able to develop the drugs that would keep him alive? Everyone is supposed to call congress to save him?

I often wonder how the guys that invented insulin then sold the patent for one dollar managed?

Anyone have a number to call congress?

Anymouse

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often a signal of approaching recession.

Hi Wendy

Just lurking around here after my brother (a macro economist and long time studier of labor in USA sent me the article below. I wrote about it on another website. …

Don’t Fear the Yield Curve

Yield Curve FUD

Today’s UST movement was pushed by the labor report and the 5.6% or so raise in YoY wages.

This paper (link below) by Fed researchers says - the 2/10 spread (inverted again this am) is a muddled at best indicator (spurring news FUD) and that a term they use "near term forward spread is a better indicator. The premise here is that, as Knox has stated, the 2-year outlook is more in FOMC control and the market has priced in 2.4% by the 2-year - the March lift was 0.25 so 2.15% to go —or 8x 0.25. More recently predictions of FOMC is that there’ll be 2 x 0.5 and then four or so 0.25 increases out in 4Q22 & 1H23.

These researchers point to the calculated 3 month vs 8 quarter ahead rate spread that is now about 2.0% and probability of recession is 14%. Note that the data seems pretty reliable and the near term rates being more correlated (more closely in time). A quick look at the data to me shows we should worry when the nearer term rates show a 40% or more probability of recession.

Even at that the authors don’t recommend using yield spreads at all as predictors, stating <Ultimately, we argue there is no need to fear the 2-10 spread, or any other spread measure for that matter. At best, the predictive power of term spreads is a case of “reverse causality.” That is, term spreads predict recessions because they impound pessimistic—often accurately pessimistic—expectations that market participants have already formed about the economy, and thus an expected cessation in monetary policy tightening.4>>…<<…it can only make things worse if investors not only fear the prospect of a recession, but at the same time, are spooked by that fear itself, which is mirrored in inverted term spreads.>>

I recommend reading this and reviewing the data. If anyone “gets” what “effective lower bound period” means let me know. It’s been almost 50 years since I had my last stats course.

One page paper - easy read —gotta love the title - I’ll be singing the reaper all day now…and the more cowbell replay vid…

https://www.federalreserve.gov/econres/notes/feds-notes/dont…

Data

https://www.federalreserve.gov/econres/notes/feds-notes/dont…

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Traditionally banks perform better than the market during inflationary conditions. I own three of ours that are literally ‘money in the bank’.

The problem with this is the next two to three years will be disinflationary not inflationary.

Gas at the pump this morning was $3.92

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Let’s see. Current CPI per ycharts is

284.18. Check back 4/2/24.

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Costco is across town for me, but just looked it is $3.759 this morning.

While everyone is zigging as usual the world is zagging. We are entering disinflation.

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Only 11 states have prices <$3.88 —Midwest, TX and MD

https://gasprices.aaa.com/

Agree rate of growth is slowing…retail sales +3.6% vs 7-10% at 2H2021…certainly real wage growth (my simplistic calc PCE 6% - Wage growth 5% = negative 1% real wage growth) is terrible…

This also reflected by consumer sentiment is in the toilet vs price inflation. This needs to reverse —or you’re correct the move towards deflation increases.

All that said job openings phenomenal even vs 2019. Employers must be doing just fine. Demand is still up --supply chain is showing signs of coming around (inventory builds…except semiconductors).

Joe

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Joe,

Wage growth is a smaller inflationary factor.

The big factor is the wealthy have too much disposable income. The wealthy are saving more than ever and have more to spend. That is changing with the change in FED policies.

The rising interest rates are a normalization of interest rates. The USD will trend towards a greater appreciation. That will bring down resource costs.

We are entering a disinflationary period. As opposed to a deflationary period.

As we emerge growth will pick up with demand side policies. Wages will have major upward pressure with demand. The wealthy will have investments over all do well, but their spending patterns will moderate.

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“Owners of bonds and (especially) bond funds need to be aware of the way duration affects the value of bonds.”

I saw this new-to-me rule of thumb in the WSJ yesterday:

“For each year of duration, a fixed-income investment will lose about 1% of its price with each 1-percentage-point increase in interest rates. In general, a bond—or bond fund—with a duration of 5 will fall 2.5% in price if rates rise by half a percentage point, drop 5% if they go up 1 point and lose 10% if they climb 2 points.”

https://www.wsj.com/articles/fed-raising-rates-bond-fund-str…

–sutton
(already grumped about bond/fixed income funds once in the last month: https://discussion.fool.com/ipse-dixit-35068789.aspx )

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Wage growth is a smaller inflationary factor. The big factor is the wealthy have too much disposable income.

Not my field, but this analysis by Taylor and Barbosa-Filho points the other direction.

www.tandfonline.com/doi/abs/10.1080/08911916.2021.1920242
The results pose a Biden policy trilemma:
i) the only path toward a more egalitarian size distribution of income is through a rising labor share (money wage growth exceeds price plus productivity growth),
(ii) which would provoke faster inflation with feedback to rising interest rates…

DB2

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The results pose a Biden policy trilemma:
i) the only path toward a more egalitarian size distribution of income is through a rising labor share (money wage growth exceeds price plus productivity growth),
(ii) which would provoke faster inflation with feedback to rising interest rates…

DB2,

If you believe that monetary policy has something to do with inflation and wonder why we had disinflation for 12 years after the 2008 crisis despite M2 rising at a meteoric rate, then you have to look at V. The velocity has dropped to nothing. Once velocity starts moving the the massive M2 starts being felt.

https://fred.stlouisfed.org/series/M2V

While velocity certainly is not rising, it is no longer in free fall.

This chart of M2 is somewhat deceptive as it is linear vice log and it is not corrected for either inflation nor the growth in the national GDP. A corrected chart would be much more instructive.

https://fred.stlouisfed.org/series/M2SL

In any case the world demographics will reprice labor and this repricing will increase velocity, further it is unlikely that the Fed can pull enough cash out of the system to stop inflation any time soon.

I advise that anyone that can, plan on hedging against inflation for a few years or more. The only thing that may cause disinflation would be a move away from fossil fuels and the internal combustion engine. This would be a large boost to economic productivity. However, between now and then a truly massive infrastructure must be built with (drum roll please) . . . labor.

This is why, among other reasons, I am still remaining in the labor force and intend to remain in the labor force as long as my health holds out and the job is stone cold easy.

Cheers
Qazulight

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DB,

From their abstract:

“macroeconomic structuralist approach in contrast to micro-oriented monetarist analysis.”

To me “macroeconomic structuralist” means sociologist. There are two lines in particular in the abstract that make this sociology as opposed to econ, one “Recognizing that inflation of the value of output and its costs of production must be equal” which frankly is not at all how econ works, and two “Contemporary structuralist theory suggests that conflicting income claims set the inflation rate.” the old sociologists sad days of conflict.

The “trilemma” becomes a fiction.

The admin is proposing higher taxes to cut off inflation. Good old fashioned econ applied appropriately for the times.

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further it is unlikely that the Fed can pull enough cash out of the system to stop inflation any time soon.

I advise that anyone that can, plan on hedging against inflation for a few years or more. The only thing that may cause disinflation would be a move away from fossil fuels and the internal combustion engine.

Qaz,

While it is early and we are just beginning to see it, we have entered a disinflationary period. Yes the FED can sell enough of its bond holdings to soak up plenty of the M2.

Gasoline is now a deflationary pressure.

The US and probably most of the global health sectors (excluding China and a few other places) are seeing a rapid decline in expenditures.

The iron curtain we are pulling down not just with Russia but in slow motion with China is creating a factory build out in the west. Economies of scale and automation this is far less inflationary than previously contemplated. And against other costs may prove a deflationary force depending on the industry. But that is medium to longer term.

Interest rates play an even larger role in all of this as a disinflationary force. Rising rates globally will be appreciating the value of many currencies. That is a deflationary force on commodities from food to energy to metals as the USD and EUR become more valuable.

As I am saying it has only just begun, but we are getting solidly into disinflation.

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While it is early and we are just beginning to see it, we have entered a disinflationary period. Yes the FED can sell enough of its bond holdings to soak up plenty of the M2.

Gasoline is now a deflationary pressure.

The US and probably most of the global health sectors (excluding China and a few other places) are seeing a rapid decline in expenditures.

The iron curtain we are pulling down not just with Russia but in slow motion with China is creating a factory build out in the west. Economies of scale and automation this is far less inflationary than previously contemplated. And against other costs may prove a deflationary force depending on the industry. But that is medium to longer term.

Interest rates play an even larger role in all of this as a disinflationary force. Rising rates globally will be appreciating the value of many currencies. That is a deflationary force on commodities from food to energy to metals as the USD and EUR become more valuable.

As I am saying it has only just begun, but we are getting solidly into disinflation.

Leap,

This is pretty much how I see it also. The catch is the also the win.

Labor rates will continue to
climb until productivity can put a dent in labor demand. The problem is two fold, There maybe also be a third factor.

One as labor rates increase, laborer spend money, this increases the velocity of money this V combined with M2 creates monetary inflation. This is going to be big and taming this inflation is going to be difficult.

Second, capitalists, those with capital to invest, have structured their businesses to make use of cheap labor. This has created businesses that has not maximizad labor productivity and wages will continue to rise without increases in productivity. This is generally found in an inflationary cycle. I do not if it is causal or just correlated.

Finally, in a perverse turn of events, it seems that rising wages is taking labor off the
market, not bringing it onto the market as simple supply and demand theory says it should. My guess, or conjecture is that as the head of household makes enough that the lessor wage partner is not required to bring in income, they remove themselves from the labor market to pursue unpaid work, i.e. raise kids, take care of elderly
or something else. In other cases where an individual is holding down two jobs, they reduce one as the wages on the other rise. This perverse action will continue for a while, maybe indefinitely until the labor available in India and later sub Saharan Africa can be tapped. For now these labor pools are not readily available.

For me, I do not see disinflationary forces being detectable before 2025, with 2027 being the likely inflection year.

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I bet my bank will find a way to raise mortgage rates to 5 percent or higher while continuing to pay me zero on savings.

You can buy mortgage securities that pay much more than zero! They are typically made up of 30-year mortgages, and roughly have a duration somewhere between 7 and 10 years.