Weekly Market Update 4/11/2022
The nation’s economy added 431,000 non-farm payrolls in March, with a pickup in the more highly-compensated manufacturing and professional and business services jobs to go along with the continued sharp recovery in travel and leisure positions. For the first quarter, an estimated 1.685 million jobs were created, as COVID-19 concerns stateside eased. The unemployment rate fell again, to 3.6% last month.
Inflation remains stubbornly high. The Personal Consumption Expenditures (PCE) Index, which reflects the changes in the prices of goods and services purchased by consumers in the United States and is considered a key gauge of inflation by the central bank, jumped 6.4% on a 12-month basis in February.
The mettle of the U.S. consumer sector, which led the recovery back from the coronavirus-driven 2020 recession, will be tested over the next several quarters. The March employment report showed that average hourly earnings increased by 5.6% in the past 12 months. That figure trailed both the consumer and producer price advances recorded over the same stretch. A continuation of this trend may strain consumers’ budgets, leading to lower demand that would ultimately hurt the pace of GDP growth.
These factors are giving the Federal Reserve the green light to act aggressively on the monetary policy tightening front. The tight labor market and hot inflation data have most pundits now thinking the central bank will hike the benchmark short-term interest rate by 50 basis points at the next (May) Federal Open Market Committee (FOMC) meeting. The Fed’s goal is for the benchmark federal funds rate to be in the 1.75%-2.00% range by year’s end.
Meantime, the “inversion” of the Treasury yield curve bears watching. An inverted yield curve, where yields on longer-term debt fall below those on shorter duration debt of the same credit quality, occurred in early April. The inverted curve has proven in the past to be a relatively reliable lead indicator of a recession–although there’s no reliable track record as to when.
Conclusion: Investors continue to take signs of a more-restrictive Federal Reserve in stride, perhaps with the early-year stock market selloff discounting the likelihood of less accommodative central bank policies in 2022. Still, with borrowing costs on the rise—and bond prices falling—equities look like the better near-term investment option.