Bond yields continue to swell along with inflation expectations
Stocks lost ground once again on Friday as global economic fears continued to overhang investor sentiment. Employment remains strong as the rate of unemployment is positioned just above pre-pandemic lows.
Feeling groovy. Well, folks are back on the job. At least it appears that way from Friday’s monthly employment data dump. In April, 428k workers were hired, quite a bit more than economists were expecting. The Unemployment Rate remained at 3.6%, which is just above its already historically low, pre-pandemic level. On this count the Federal Reserve Board can rest, having achieved success on at least 1 of its 2 mandates. Having such low unemployment would, in theory, put lots of pressure on prices for 2 reasons. More people gainfully employed lead to greater spending, which drives prices higher while employers clamoring for a shrinking group of applicants are forced to raise wages, a big driver of inflation. Though this seems reasonable, it does not always turn out that way. You may recall that just prior to the pandemic, the Unemployment Rate was at 3.5%, a 50-year low while inflation was just around the Fed’s 2% target. However, that is clearly not the situation at the moment where inflation is raging at its highest level in nearly 4 decades. This has led the Fed to engage in an aggressive tightening pattern with hopes that the higher rates will cause consumers to spend less and allow prices to simmer down.
According to the latest GDP reading, though it reflected an unexpected quarterly decline, consumer spending remained strong, despite inflation and rising costs of borrowing. While that is seemingly good for economic growth, it is worrisome for the Fed and that is likely the cause of the recent sharp rise in bond yields which have contributed to the recent volatility in stocks. Friday’s number did have a small shard of positive news for inflation. Average Hourly Earnings grew a +0.3% in April, which was lower than expected and lower than the prior month’s +0.5%. Later this week we will get fresh inflation numbers from the Bureau of Labor Statistics and those are expected to reflect a moderation after the recent spike. Despite this, stocks remain under significant pressure with longer maturity bond yields continuing to climb, factoring in continued inflation. Additionally, continued fear around the war in Ukraine and unknowns about weaker growth in China continue to cause further volatility. Volatility which is likely to continue for the near future.
FRIDAY’S MARKETS
Stocks fell on Friday despite a neutral release of unemployment figures. The S&P500 slid by -0.57%, the Dow Jones Industrial Average fell by -0.30%, the Nasdaq Composite Index lost -1.4%, and the Russell 2000 Index gave up -1.69%. Bonds fell and 10-year Treasury Note yields climbed by +9 basis points to 3.12%. Cryptos lost -0.44% and Bitcoin was lower by -1.04%.
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