It's been a rollercoaster of a couple of days, with the non-farm payroll data sending us to new heights.
The unexpected 172K non-farm payroll number had the whole market freaking out, pushing the swap market's rate hike probability above 70% in one go.
Will there be a rate hike?
At least from my perspective, the Fed will likely keep rates in the 3.5%–3.75% range during June, and the idea of a rate hike this year is more of a market overreaction than anything else.
Right now, it's obvious that the market is spooked by all the major headlines, with the probability of a rate hike being pushed to 72.7% due to emotional trading, but that's just a short-term knee-jerk reaction.
A strong labor market doesn't equate to an overheated economy, and it certainly doesn't mean inflation is hard to bring down, nor does it directly trigger a resumption of rate hikes.
American workers are getting poorer; they're being forced back into low-wage jobs just to make ends meet:
- In May, nominal hourly wages grew by 3.45% year-on-year, but the actual inflation rate sits at 3.8%, which means the real purchasing power of American workers is in negative growth territory. Several quarters of inflation pressure have rapidly drained household balance sheets.
- Data shows that high-paying jobs in finance dropped by 22,000, while the bulk of new jobs came from leisure and hospitality (+70,000) and local government (+55,000). If the economy were overheated, firms should be aggressively expanding in high productivity, pro-cyclical core sectors.
And that’s exactly what’s happening; ordinary Americans are having to swallow their pride and take low-paying gigs in restaurants and hotels just to make ends meet in the face of soaring prices and shrinking real wages.
The survival pressure is pushing an increase in labor supply, but it doesn't have a sustainable demand-pull effect (because as soon as cash is in hand, inflation devours it), and the Fed's higher-ups are well aware of this. On the contrary, it suggests that high rates are deeply eroding the real economy. If policymakers mistakenly interpret the temporary revival of the bottom tier as a sign of inflation and blindly restart rate hikes, we could quickly spiral into a credit and consumer crash.
There won't be a rate hike, there won't be a rate cut, and we’re not at a deadlock yet, but the risk market will likely have to endure a high-rate environment for some time.
The unexpected 172K non-farm payroll number had the whole market freaking out, pushing the swap market's rate hike probability above 70% in one go.
Will there be a rate hike?
At least from my perspective, the Fed will likely keep rates in the 3.5%–3.75% range during June, and the idea of a rate hike this year is more of a market overreaction than anything else.
Right now, it's obvious that the market is spooked by all the major headlines, with the probability of a rate hike being pushed to 72.7% due to emotional trading, but that's just a short-term knee-jerk reaction.
A strong labor market doesn't equate to an overheated economy, and it certainly doesn't mean inflation is hard to bring down, nor does it directly trigger a resumption of rate hikes.
American workers are getting poorer; they're being forced back into low-wage jobs just to make ends meet:
- In May, nominal hourly wages grew by 3.45% year-on-year, but the actual inflation rate sits at 3.8%, which means the real purchasing power of American workers is in negative growth territory. Several quarters of inflation pressure have rapidly drained household balance sheets.
- Data shows that high-paying jobs in finance dropped by 22,000, while the bulk of new jobs came from leisure and hospitality (+70,000) and local government (+55,000). If the economy were overheated, firms should be aggressively expanding in high productivity, pro-cyclical core sectors.
And that’s exactly what’s happening; ordinary Americans are having to swallow their pride and take low-paying gigs in restaurants and hotels just to make ends meet in the face of soaring prices and shrinking real wages.
The survival pressure is pushing an increase in labor supply, but it doesn't have a sustainable demand-pull effect (because as soon as cash is in hand, inflation devours it), and the Fed's higher-ups are well aware of this. On the contrary, it suggests that high rates are deeply eroding the real economy. If policymakers mistakenly interpret the temporary revival of the bottom tier as a sign of inflation and blindly restart rate hikes, we could quickly spiral into a credit and consumer crash.
There won't be a rate hike, there won't be a rate cut, and we’re not at a deadlock yet, but the risk market will likely have to endure a high-rate environment for some time.