Each new month brings a new jobs report which is one of the most heavily watched economic reports on Wall Street. April’s Job Report was no exception with the headline unemployment reading dipping below 3.90%. However, it is what is inside the report that moves the bond and equities markets, and not necessarily the headline reading.
The April jobs report was a bit of a disappointment with 164,000 jobs created versus 190,000 expected. The report did include some positives and negatives within the numbers.
Within the report, the hourly earnings grew less than expected with the annualized pace of wage growth coming in at 2.600%, down from the 2018 January pace of 2.900%. The U6 number, or the total unemployed, fell to 7.8% and the Labor Force Participation Rate ticked down to 62.8% from 62.9%
Earlier in the week, another important inflation reading was published, the Core PCE, which is the Federal Reserve’s favorite inflation gauge. Per this report, inflation grew at 1.90% over the previous 12 months and is now approaching the Fed’s target rate of inflation which is 2.00%. In the Fed’s eyes, a 2% yearly gain in inflation is a sign of a healthy economy and will enable the Fed to continue to raise short-term interest rates. If inflation were to get out of hand (which is not currently the case), the Fed could decide to raise interest rates more quickly to slow down the economy and prevent asset prices from becoming too bubbly.
At the moment, we remain in a “Goldilocks environment” with no sign of a recession. Interest rates, while higher by a bit, are still below 3% on the 10-year Treasury note, corporate earnings continue to beat estimates, central banks around the world continue to be accommodating, and finally, global tensions such as the threat of tariffs with China and the threat of war with North Korea have been subdued.
With all of this in mind, we remain biased toward locking in interest rates given the overall positive economic environment that we are experiencing and expectation of higher short-term interest rates over the coming months which should move the entire yield curve higher.