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Written by: Tim Pierotti
Equities are higher this week on softer economic data which has pushed bond yields lower across the curve. Importantly, the weakness came from two readings in the labor market. The Quit Rate moved lower which suggests that employees don’t feel confident that they can leave their current job and get another one at a higher wage. Quits have been very high in this cycle and that is because job leavers were getting, on average, 10%+ more to move on. Also, Job Openings fell. In this cycle, Job Openings per job seeker soared to unprecedented highs, but have been steadily falling recently.
Maybe this is an obvious point, but softer labor inflation is a result of a weakening economy. Despite the Atlanta Fed Nowcast running at 5.9% (The St. Louis Fed Nowcast is at <1% fwiw) economic data has begun to surprise to the downside over the last couple weeks after several months of surprising to the upside.
Monetary policy manifests with long and variable lags. Amid a decade of non-existent inflation, homeowners locked in low mortgages and business owners termed out fixed rate debt. But that doesn’t mean interest rates no longer matter, they just take longer to matter. Also, the rest of the world is slowing. Much of Europe is in recession and China is floundering under the weight of its slow real estate train wreck.
My point is this: our call is not that inflation is going to high in perpetuity even in the face of weakening demand. The call is that there will be inflation volatility which is the aspect of the future economy that most differs from previous decades.
The “$64,000 Question” is how does the 10-year trade assuming we continue to see growth soften. We can be fairly certain that the front end will rally, but the back end is a harder question. Today the 10-year is rallying, but my concern is that the precedent of previous slowdowns may not be repeated this time. The Treasury will be selling a great deal of long dated bonds over the next year. We may soon find out just how embedded secular inflation fears have become.
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