Friday’s August 2021 job report was a big miss. The consensus was that 750,000 new jobs were expected but the number was woefully lower. Bond yields initially fell, but then rose as inside the report it was noted that wages increased faster than expected in a sign that structural inflation is ramping up faster than forecasters have predicted. If wage growth at this level is sustained, it could lead to a further rise of costs of goods and services. The Delta variant specifically hurt the travel and leisure industry as there were no job increases in this sector. The unemployment rate did fall to 5.20% but remember that number only counts people actively seeking work.
The big question facing the Fed in the coming months is whether it is justified to continue to purchase $120 billion per month in Treasury and MBS bonds. Massive Fed stimulus has had direct positive impacts on financial assets including equities and homes prices. However, as home prices surge around the country, some are beginning to wonder if this program is still needed as the pinch of inflation is beginning to be felt by low-end workers the most. These workers see no benefit from low rates as they are not invested in the market and most are not homeowners.
Our feeling is the Fed will probably taper, but not next month. Bill Gross, the former bond king, sees the 10-year moving up to 2.000% next year. Even some Fed members have opined on the need to scale back bond-buying as this program was not designed to assist supply-side issues in the economy. Employers all over the country are looking for workers and goods and service prices are rising as supply chain issues delay or limit how much of these goods and services can be made and shipped. Some are also beginning to worry from afar about stagflation, the combination of a slowing workforce and rising prices.
Keep an eye out for Fed speak, increased volatility in the equities market, and the direction of the 10-year bond in the coming weeks. As we enter a historically volatile part of the year for the markets, the added concerns over Fed policy could make for some tough days ahead. However, one must keep in perspective the incredible run in equities and housing over the last year and a half should markets move lower.
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