A Cushion Against Potential Economic Turbulence

There was a significant reaction in the bond market to the latest job growth figures, which exceeded expectations. The positive surprise led to a sharp 10 basis point rise in long bond yields. Interestingly, equity markets remained resilient in the face of this increase, suggesting a collective market relief that we are not heading toward a slowdown or recession. This resilience underscores the ongoing strength in corporate earnings, providing a cushion against potential economic turbulence.

While the payroll numbers were robust, showing a strong addition of jobs, the unemployment rate ticked up to 4% for the first time in three years. This increase might capture headlines, but it’s essential to delve deeper. The household survey, which showed job losses, contrasts with the firm establishment data, which is generally more reliable due to its larger sample size and scope. For background, the establishment surveys approximately 119,000 businesses and government agencies, representing approximately 629,000 individual worksites. There have historically been 60,000 households surveyed for the unemployment rate, but a news item broke on Friday suggesting higher costs of surveys and budgetary constraints at the BLS would be reducing the number of households surveyed to 55,000. We might expect more noise in these two jobs surveys ahead. Nevertheless, job losses were concentrated among younger age groups, with stable employment levels in middle and older age groups.

One datapoint that weighed on the market: wage increases came in above expectations, stoking concerns about inflationary pressures. However, it's crucial to recognize that productivity is a wedge between wage gains and inflation. Although productivity gains were modest in the first quarter, there is potential for improvement which could offset some of the inflationary effects of wage increases.

Looking ahead, all focus will be on the CPI report and the Fed's commentary this week, which will be critical in shaping market expectations and monetary policy direction.