Roaring job market puts ‘boomflation’ back on the map for investors

Instead, concern focused on what a dizzying job market and rising costs mean for stock and bond portfolios, particularly if it turns into a combination of higher growth and inflation with staying power.

How to call such a scenario? “Boomflation,” said Kent Engelke, chief economic strategist at Capitol Securities Management, pointing to annual wage gains pegged at 5.2% on Friday, which should help fuel growth.

On the darker side, however, is Inflation at 41-year high starting in June, which can be even harder to tame after more workers in July left from the job market.

“In the more immediate term, this directly challenges the view that the Fed will finish raising rates when the benchmark rate breaks above 3%,” Engelke said by phone, adding that he suspects the ultimate goal now moves closer to 4 %. %

The surprisingly strong jobs report puts next Wednesday’s consumer price index update for July into sharper focus, with many on Wall Street waiting for signs that inflation may finally be peaking.

“It’s good from a consumer perspective,” Yung-Yu Ma, chief investment strategist at BMO Wealth Management, said of the jobs report, adding that many households have struggled. “Even with strong wage gains, average inflation has been higher,” he said.

“The challenge is that it makes it harder for the Fed to reduce inflation.”

60/40 works, again

It doesn’t look like the bottom is falling out of the US economy, but assets from stocks to bonds to cryptocurrencies didn’t hold up.hort of a shellahitting in the first half of the year. What happens next?

“Stagflation fears, that kind of crash,” said Dec Mullarkey, managing director of investment strategy and asset allocation at SLC Management.

He also thinks recession concerns have been a bit overblown, particularly with second-quarter corporate earnings coming in relatively strong. “Equity markets have been seeing that and have held their ground,” he said. “Everyone has been calling this a bear market bounce. I haven’t been to that camp.”

Instead, Mullarkey said he is bullish on both stocks and bonds, particularly when he can gain relatively low-risk exposure to the US investment-grade corporate bond market. with a performance of around 4.3%

While short-term Treasury rates have been “doing the rounds,” he also likes the increased stability seen in 30-year yields TMUBMUSD30Y,
3,072%
about 3.065% on Friday.

“We like a balanced approach,” said BMO’s Ma. “To the extent that there could be more challenges in equities, fixed income is more supportive than it was in the first half of the year.”

But Ma also said there will be “great, great attention” on Wednesday’s CPI reading for signs of recalcitrant inflation. “Especially in light of the jobs report, if both point to tighter inflation, it’s possible that the narrative will change, where the Fed will ultimately have to raise interest rates.”

The Fed’s aggressive rate hikes since March have already pushed the fed funds rate into a range of 2.25% to 2.5%, and more jumbo rate hikes are now likely.

Read: July jobs number has traders eyeing another huge Fed rate hike

A ‘neutral’ rate of 3%

Higher wages may reduce corporate profits, although households earn more to offset rising prices for gasoline, groceries, cars and housing. A stronger labor market eases recession fears. But the Fed’s fight against inflation just got tougher.

What if it comes down to a certain level of booming inflation that is tolerable in the US, given all the strings the government has pulled during the pandemic to keep households from losing their homes and keep the economy from falling? in a deep and prolonged recession?

“It’s really about whether the world can live on 5% wage increases,” Mullarkey said, adding that many of the wage gains have gone to lower-income workers. “That could be a healthy recovery that he deserves.”

On the shortage of workers, he also said that it is wrong to blame older workers who have retired. “We are missing 2 million workers who would have been coming from abroad,” Mullarkey said, pointing to immigration restrictions put in place under the previous administration. “That has left a hole in our workforce.”

Another approach could be for the Fed to consider abandoning its idea that a 2% annual inflation rate is a “neutral” target.

“What sounds like a commitment from the Fed to get to 2% inflation is an elusive number,” said BMO’s Ma, adding that he also risks the central bank “tightening too much, by not see an easy way to reduce inflation other than slowing the economy down any more than people would probably like to see it slow down.”

On the other hand, from an economic and markets standpoint, “it’s fine to have a slightly higher range of 2% to 3% given the inflation benchmarks and the tightness of the labor market,” he said. “There is nothing magical about the 2%.”

Although, he doesn’t think the mindset, at the Fed, is there yet.

Other economic data available for next week is the New York Fed’s 3-year inflation expectations, followed by the NFIB Small Business Index on Tuesday. Then there is Wednesday’s important CPI gauge for July and Friday’s consumer confidence reading.

US stocks closed mixed on Friday, with the Dow Jones Industrial Average DJIA,
+0.23%
it rose 0.2%, but with a weekly loss of 0.1%, according to Dow Jones Market Data. The S&P 500 SPX Index,
-0.16%
and Nasdaq Composite COMP,
-0.50%
posted weekly gains of 0.4% and 2.2%, respectively, both posting a third straight week of gains and their best stretch since April 1.

Related: ‘One of the Strongest Job Markets in the Past 50 Years’: Looking for a Pay Raise? This jobs report has good news for you.

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