Treasury bonds were fairly quiet last week and have been tame so far this week too.
Stocks sold off recently when Gary Cohn, President Trump’s top economic advisor, resigned, reportedly because Cohn and Trump clashed over the idea of a trade war.
Despite the continuing political circus, Treasury yields traded in a narrow range ahead of last Friday’s jobs report. In fact, volatility ebbed significantly, as long-term Treasury yields ranged from 3.11% to 3.15%.
February employment was a mixed bag. Non-farm jobs were up by 313,000, trouncing an estimate of 205,000. The labor participation rate increased to 63% from 62.7%.
Now for the bad news: The unemployment rate stayed at 4.1% on the expectation it would drop to 4%.
And, worse yet, earnings were only up 0.1% on the expectation of a 0.2% increase. The annualized growth in wages fell to 2.6% from 2.8%. That was a disappointment, especially because the Federal Reserve was expecting wages to push inflation up.
Speaking of inflation, Tuesday morning’s release of the February Consumer Price Index (CPI) went pretty much as expected. CPI was up 0.2% month over month, as expected, and 2.2%year over year. Core CPI (less food and energy) was also up 0.2%, as expected, and 1.8% year over year.
According to the Bureau of Labor Statistics, new and used vehicle prices fell 0.5% and 0.3%, respectively, while apparel costs rose 0.3%. Housing also rose 0.3% on the month, while owners’ equivalent rent gained 0.2%.
So far, consumer prices haven’t moved up to the magic 2% level the Fed targeted a decade ago, even though wholesale prices hit 2% last May. The February Producer Price Index (PPI) is out Wednesday. The consensus forecast is for something in the neighborhood of Tuesday’s CPI number, but core PPI is tracking at 2.5% on the year.
Producer-price increases eventually get passed along to consumers, so you would think that the Fed and investors would be concerned with wholesale inflation, but not so. So far, surprises in the PPI have been met with a collective yawn.
Even though employment has been strong and unemployment low, wage growth has been stubbornly low.
That seems to be the missing piece to the Fed’s puzzle.
Even though inflation and wage growth have been muted, I still expect the Fed will hike rates next week. Why? Because policy makers at the Fed still expect wages to move higher, with consumer inflation to follow.
We’ll just have to wait and see.
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