The latest Employment Situation Report released on October 4, 2024, showed nonfarm payrolls increasing by 254,000 in September, with the unemployment rate holding steady at 4.1%. Wages rose by 0.4% month-over-month, translating to an annualized growth rate of 4.9%. Job gains were seen across industries such as healthcare, construction, and food services, while wage growth continued at a steady pace. This report confirms that the labor appears somewhat resilient.
However, none of this comes as a surprise. It is not typical to see a decline in employment before corporate profitability starts to falter, and the fact is, corporate profits are rising. As we’ve previously discussed, inflation is likely to stay above trend for some time, as consumers are largely insulated from tighter monetary policy and the government continues to run large pro-cyclical deficits. With high cash balances and most consumer debt tied to low, fixed-rate mortgages, households have not felt the full impact of higher interest rates. In fact, it’s important to note that monetary policy hasn’t really been as “tight” as some might think, precisely because consumers remain insulated.
Inflation to Remain Stubbornly High
The latest jobs report only reinforces our view that inflation will persist above market expectations. The September wage growth of 0.4% month-over-month, annualizing to 4.91%, is further proof that inflationary pressures are not going away. With wages increasing, it’s likely that inflation will continue its climb, particularly in an economy where consumer demand remains strong.
Another key development is the Federal Reserve’s recent decision to cut interest rates by 0.5%, despite inflation still hovering above trend. The Fed’s decision to lower the federal funds rate to 4.75%-5% signals a more dovish stance, suggesting that they are more concerned about supporting the labor market and economic growth than curbing inflation. This move is likely to fuel additional inflationary pressures as borrowing costs fall and liquidity increases.
Implications for Global Liquidity and Markets
Inflation is set to remain elevated for the reasons discussed—strong consumer demand, resilient corporate profits, and a dovish Fed stance. The U.S. government is also playing its part in contributing to liquidity. The Treasury General Account is projected to decline by $150 billion in the fourth quarter, and recent upticks in government spending are expected to add further liquidity to the markets.
This environment is bearish for the U.S. dollar but bullish for global liquidity. A weaker dollar, combined with a dovish Fed, allows China more room to roll out further stimulus. Additionally, it has paused the Bank of Japan’s normalization efforts, keeping their monetary policy accommodative. These factors collectively point toward a rise in global liquidity, which is a strong tailwind for risk assets.
With U.S. growth trending well, corporate profits healthy, and the labor market solid, risk assets are likely to perform well over the next quarter or two. However, this does not mean markets will be free from volatility. The persistence of inflation poses an ongoing risk, and we cannot be certain the Fed will continue to sit idly by if inflation begins to accelerate. A sudden shift in policy could create turbulence in global liquidity, impacting risk assets.
Stay Diversified and Vigilant
While risk assets are poised for growth, investors should remain cautious. Inflation remains a persistent problem, and any tightening of monetary policy could dampen the current liquidity-driven rally. Investors should stay diversified and vigilant for any sudden changes in the Fed’s stance.
At Euro Pacific, we are here to help you navigate these uncertain waters. If you’re interested in diversifying your portfolio or learning more about how our strategies can help you manage risk, we encourage you to reach out to one of our advisors or explore our funds at EuroPac.com.
Disclosure: Any tax or legal information provided is merely a summary of our understanding and interpretation of some of the current income tax regulations and it is not exhaustive. Investors must consult their tax advisor or legal counsel for advice and information concerning their particular situation. Neither the Funds nor any of its representatives may give legal or tax advice.
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