Nonfarm Payrolls and the challenge of taming inflation

Outlook: We get nonfarm payrolls today, an interesting event because most markets are closed for the holiday. The WSJ forecast is a gain of 238,000 jobs and the unemployment rate the same 3.6%. No matter how hard the pundits stretch, you can get only so much cooling of the hot labor market.

As we warned yesterday, the press can be brazenly misleading. The WSJ headlines “cooling labor market” from the jobless claims data but that is true only in the context of the BLS having revised its seasonality protocol. Buried down near the bottom of the story: “Claims totals remain close to the 2019 pre-pandemic average of about 220,000.” In fact, the latest week was 218,000.

Granted, we have seen a series of somewhat disappointing data that might be starting to add up to something serious, and off in the corner is the fear of a credit crunch, if not an outright banking crisis. Some of the data includes factory output and the building of inventories, with the ISM manufacturing PMI down to 46.3 in March from 47.7 and the lowest since May 2020—with new orders and employment down (but prices, too).

While we can grant there is a litany of mostly minor economic setbacks, including the Atlanta Fed Q1 GDPNow sinking from over 3% to 1.5%, it’s not at a level that clearly signals recession. That’s what makes the market clinging to the idea of rate cuts this year so puzzling, especially in light of St. Louis Fed Bullard yesterday being crystal-clear--“Financial stress seems to be abated, at least for now. And so it’s a good moment to continue to fight inflation and try to get on that disinflationary path.”

In fact, the Fed’s remediation is working. “Continued appropriate macroprudential policy can contain financial stress, while appropriate monetary policy can continue to put downward pressure on inflation…. I do think we should continue to pursue our interest rate path and make sure that we get the disinflation to occur in 2023 and 2024 so that we put the inflation problem behind us while the labor market is still strong.

“I think inflation’s going to be sticky going forward and it’s going to be hard to get inflation back down to the 2% target. So we’re going to have to stay at it.”

About that sticky inflation—the New York Fed affirms it. The New York Fed has revised its Multivariate Core Trend (MCT)  It fell in Feb to 4.5% from 4.6% in Jan but uncertainty is high, resulting wide range of 4-5.2%. This differs very little from the core PCE already reported at 4.6% from 4.7%.

It’s a nice chart, but look how much higher the band lies compared to the Fed’s desired 2%. Not even close. Remember Cleveland Fed Meister expects 3.5% by year-end this year.

“According to our latest estimates, the trend has held steady at a level between 4.5 and 4.7 percent since October 2022 after exceeding 5 percent during most of 2022. The sectoral composition remained stable with the contribution of core goods, core services excluding housing, and housing not too different from their values in October 2022.”

Bottom line: US inflation is sticky and will persist, even if PMI services prices are falling. The labor market will remain tight. The Fed will not get evidence it can stop tightening and as we know from the forecast, it’s willing to accept GDP down to a lousy 0.4% this year without blinking. Those inverting the yield curve are exaggerating, if not entirely wrong. Payrolls today are just another brick in the wall. A high number reinforces the Meister/Bullard stance without giving the dollar any real support. A low number encourages the recession and rate-cut gang—and a falling dollar. We can’t see anything here that supports a rising dollar except position adjustment. And note that commodities are increasingly in the recession-coming camp, including gold (yields down, gold up). 

Forecast: We saw a minor dollar firming on short-covering and position-paring due to the holiday, but the primary loser was the pound and did not, surprisingly, include the yen. That could be due in part to expectations of a bad jobs report in the US and the incoming BoJ Gov Ueda on Monday who might ditch curve control, despite his protestations of not having any such plan. 

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