PrefBlog

Jobs, jobs, jobs!:

The American labor market unleashed a burst of hiring in January, producing another wave of robust job growth even as interest rates continue to rise.

Employers added 517,000 jobs on a seasonally adjusted basis, the Labor Department said on Friday, an increase from 260,000 in December.

The unemployment rate was 3.4 percent, the lowest since 1969.

Even as hiring surged, wage growth slowed slightly to 0.3 percent compared with December.
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In addition to the report on Friday, the government released data this week showing that the number of posted jobs per available unemployed worker — a measure that policymakers have been watching closely — rose again in December. And despite a cavalcade of layoffs in the technology sector, the overall number of pink slips has stayed extremely low.
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The job growth was broad-based, including in some industries that economists had expected to show signs of slowing. Employers in leisure and hospitality, including restaurants and bars, brought on a bevy of workers.

The labor force participation rate was unchanged at 62.4 percent. Fed officials have been hoping to see an increase in the ranks of those available to work, which could alleviate the tightness in the labor market that is driving up wages and contributing to inflation.
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Average hourly earnings climbed by 4.4 percent over the year, more than forecast in a Bloomberg survey of economists but less than 4.8 percent in December. Pay growth has been decelerating for months, though it remains faster than is typical and is still notably quicker than the pace that Fed officials have at times suggested would be consistent with their 2 percent inflation goal.

The Bank of England hiked 50bp yesterday:

The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment. At its meeting ending on 1 February 2023, the MPC voted by a majority of 7–2 to increase Bank Rate by 0.5 percentage points, to 4%. Two members preferred to maintain Bank Rate at 3.5%.

Global consumer price inflation remains high, although it is likely to have peaked across many advanced economies, including in the United Kingdom. Wholesale gas prices have fallen recently and global supply chain disruption appears to have eased amid a slowing in global demand. Many central banks have continued to tighten monetary policy, although market pricing indicates reductions in policy rates further ahead.

UK domestic inflationary pressures have been firmer than expected. Both private sector regular pay growth and services CPI inflation have been notably higher than forecast in the November Monetary Policy Report. The labour market remains tight by historical standards, although it has started to loosen and some survey indicators of wage growth have eased, alongside a gradual decline in underlying output. Given the lags in monetary policy transmission, the increases in Bank Rate since December 2021 are expected to have an increasing impact on the economy in the coming quarters.
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In the latest modal forecast, conditioned on a market-implied path for Bank Rate that rises to around 4½% in mid-2023 and falls back to just over 3¼% in three years’ time, an increasing degree of economic slack, alongside falling external pressures, leads CPI inflation to decline to below the 2% target in the medium term. There are considerable uncertainties around this medium-term outlook, and the Committee continues to judge that the risks to inflation are skewed significantly to the upside.

The European Central Bank also hiked 50bp:

The Governing Council will stay the course in raising interest rates significantly at a steady pace and in keeping them at levels that are sufficiently restrictive to ensure a timely return of inflation to its 2% medium-term target. Accordingly, the Governing Council today decided to raise the three key ECB interest rates by 50 basis points and it expects to raise them further. In view of the underlying inflation pressures, the Governing Council intends to raise interest rates by another 50 basis points at its next monetary policy meeting in March and it will then evaluate the subsequent path of its monetary policy. Keeping interest rates at restrictive levels will over time reduce inflation by dampening demand and will also guard against the risk of a persistent upward shift in inflation expectations. In any event, the Governing Council’s future policy rate decisions will continue to be data-dependent and follow a meeting-by-meeting approach.

The New York Fed has released a paper by Julian di Giovanni, Şebnem Kalemli-Özcan, Alvaro Silva, and Muhammed A. Yıldırım titled Quantifying the Inflationary Impact of Fiscal Stimulus under Supply Constraints:

This paper builds on Baqaee and Farhi (2022) and di Giovanni et al. (2022) to quantify the contribution of fiscal policy to U.S. inflation over the December 2019-June 2022 period. Model calibrations show that aggregate demand shocks explain roughly two-thirds of total model-based inflation, and that the fiscal stimulus contributed half or more of the total aggregate demand effect.
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U.S. headline inflation has hit levels not seen for several decades, reaching 9 percent per annum at its peak in June 2022, before declining to approximately 7 percent per annum by the end of 2022. In contrast, inflation was below 2 percent before the 2020 COVID-19 pandemic.

A priority that has been at the top of the minds of both policymakers and academics alike has been to quantify the relative importance of the key factors in driving the observed inflation, particularly the relative importance of supply bottlenecks vs. consumer demand, as the U.S. and world economies struggled with supply-demand imbalances arising from the COVID-19 health shock combined with stimulative policies.

The literature thus far has found differing results, ranging from one-third to two-thirds contributions from supply factors (with the remaining being demand). Shapiro (2022a,b) takes an econometric approach while di Giovanni et al. (2022) and Ferrante, Graves and Iacoviello (2022) use quantiative models.

Though these papers provide important early evidence on the different channels that drove the surge in inflation, none of them take a stand on the inflationary impact of specific policy actions. In particular, the 2021 Biden fiscal package totaled 15% of GDP and has been blamed by some for today’s high inflation (Blanchard, Domash and Summers, 2022).

The IMF has published a piece in defence of globalization:

Today’s surge in inflation grows out of the interplay of supply chain disruptions with large fiscal deficits. The pandemic, followed by Russia’s invasion of Ukraine, upended supply chains and produced scarcities. Rich industrial countries responded to the shortages, inequalities, and social stress with large fiscal packages. In the ensuing spiral, increased spending led to more demand, which led to more shortfalls. Another vicious spiral may follow. Rising food and fuel prices could spark discontent, protests, even revolutions and government breakdowns around the world.

The inflationary spiral may appear to herald a quite different world, split into competing blocs that pursue costly “friendshoring” strategies of steering trade to friendly nations and regimes while attempting to hobble rivals. Large states rethink the benefits of globalization and attempt to protect what they see as vital or strategic resources. This adds up to a recipe for freezing global economic growth.
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An initial globalization centered around the Industrial Revolution saw the exchange of manufactured goods from a few countries for commodities from many in the rest of the world. The 1970s created globalization through increasingly complex supply chains. The current crises are generating a different sort of globalization, shaped by information flows. There will be marked contrasts in the competence with which societies respond to the new data revolution. Today’s globalization dynamic has the potential to create a revolution of system optimization, making the result of prior technical change cheaper and more accessible. In that sense, it is globalization that constitutes the real Inflation Reduction Act.

So the Fed hiked 25bp today:

Recent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation has eased somewhat but remains elevated.

Russia’s war against Ukraine is causing tremendous human and economic hardship and is contributing to elevated global uncertainty. The Committee is highly attentive to inflation risks.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 4-1/2 to 4-3/4 percent. The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. In determining the extent of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Lael Brainard; Lisa D. Cook; Austan D. Goolsbee; Patrick Harker; Philip N. Jefferson; Neel Kashkari; Lorie K. Logan; and Christopher J. Waller.

There was some additional information in the press conference:

Powell is giving a clear reason for one reason why the Fed does not plan to stop their campaign, saying that the labor market remains extremely tight. While “the pace of job gains has slowed” the labor market continues to be “out of balance.”
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Powell notes that wage growth is abating, but remains pretty elevated. But he calls job openings — there are 1.9 per every unemployed person — important. And he notes that job creation is strong and quits are high. In short, he still sees a pretty strong job market.
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“There is only one way forward here,” Powell says, when asked about the debt limit: Congress must raise it. Anything else, like planning for what would happen if the debt limit is not raised, would be risky, he says.
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“No one should assume that the Fed can protect the economy” if Congress fails to raise the limit, he adds.
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Investors and policymakers have been in a standoff for a while now, with the Fed indicating it plans to keep rates high and markets expecting the central bank to cut rates later this year as the economy loses momentum. Powell took a shot across investors’ bow just now: “I just don’t see us cutting rates this year,” he said.

PerpetualDiscounts now yield 5.99%, equivalent to 7.79% interest at the standard equivalency factor of 1.3x. Long corporates yielded 4.89% on 2023-1-20 and since then the closing price has changed from 15.51 to 15.53, an increase of 13bp in price, with a Duration of 12.36 (BMO doesn’t specify whether this is Macaulay or Modified Duration; I will assume Modified) which implies a decline in yield of about 1bp since 1/20 to 4.88%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed to about 290bp from the 295bp reported January 25.