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Today’s newsletter is from Ethan Wolff-Mann, a senior writer. Follow him on Twitter @ewolffmann†
The chorus of those who want a weaker labor market is getting louder.
After recent jobs numbers were released last week, Bank of America analysts said in a note that they are essentially “fighting the home team” and hope the numbers aren’t as strong anymore. Since higher wages contribute to inflation, the Federal Reserve seems to agree.
“Chairman Powell keeps mentioning the relationship between the high level of job openings and wage/price inflation,” Nicholas Colas, co-founder of DataTrek, wrote in a newsletter Tuesday. “He doesn’t talk to investors. He’s talking to corporate America, and his goal is to essentially get companies to put an employee on hold and end the cycle of paying for new hires.”
Wednesday’s economic release of consumer prices (CPI) showed that inflation rose more slowly in April (8.3%) than in March (8.5%). While the report was expected to peak in March, there wasn’t much good news.
†[Substantial] Declines in the annual inflation rate are unlikely to materialize until significant improvements in geopolitical tensions (which would lower energy prices), supply chain tensions and labor market tightness,” ING’s James Knightley wrote in a note. after publication: “Unfortunately, there is little sign that this will happen any time soon.”
TD Securities analysts agreed, noting that the “report should be a concern for the Fed as core-segment price gains appear to be spreading.”
According to the consensus of economists and analysts, commodities shocks, supply chain problems and the red-hot (and very tight) labor market keep inflation high and uncomfortably so. But it is the labor market that seems to be the hardest to overcome.
While supply chain problems and major price shocks have eased, “we’re not seeing any such slowdown when it comes to labor cost pressures,” noted Bank of America global economist Ethan S. Harris. Employers can’t find people to fill vacancies, crowds of people are changing jobs, and “looking ahead, there’s no sign of stabilization.”
According to Colas, the only way to stabilize inflation is to use the monetary policy hammer to hit stock prices.
“The Fed’s goal is to convince corporate America to put in a short-term freeze and raise interest rates and talk about aggressive monetary policy until that happens,” Colas wrote. “Lower stock prices are his way of convincing C-suites and boards to do just that.”
The ‘blunt force instrument’ of the Fed’s interest rate policy
Powell has focused on the ratio of job vacancies to unemployed workers and the key consumer spending price index, which measures inflation.
“Chairman Powell mentioned the ratio several times during last Wednesday’s press conference,” said Colas, who said the number of job openings must drop from 11.5 million to about 8 million to return to normal.
The only way to get there would be some sort of business freeze.
†[Freezes] typical [happen] when C-suites and boards decide that business conditions have become very uncertain. The Fed doesn’t participate in those discussions, but it does have the blunt tool of interest rate policy and its effect on stock prices,” Colas said. “Chairman Powell has made it clear that he wants to see the openings decrease.”
The big question is by how many – and whether it will be enough to get the “R” word out?
Harris wrote that if strength continues at the pace of 200,000 openings per month that we have seen, “the Fed will have to cut job growth to ~25k per month.”
But Harris added: “If the workforce has slowed to a more trend-like 100k, then they will have to push job growth to negative 70k. That is, they should trigger a mild recession.”
What to watch today?
8:30 a.m. ET: Manufacturer price indexmonth-on-month, April (0.5% expected, 1.4% in March)
8:30 a.m. ET: Producer price index excluding food and energymonth-on-month, April (0.6% expected, 1.0% in March)
8:30 a.m. ET: Producer price index excluding food, energy, trademonth-on-month, April (0.6% expected, 1.0% in March)
8:30 a.m. ET: Manufacturer price indexyear on year, April (10.7% expected, 11.2% in March)
8:30 a.m. ET: Producer price index excluding food and energyyear on year, April (8.9% expected, 9.2% in March)
8:30 a.m. ET: Producer price index excluding food, energy, tradeyear on year, April (6.5% expected, 7.0% in March)
8:30 a.m. ET: First applications for unemploymentweek ending May 7 (192,000 expected, 200,000 during previous week)
8:30 a.m. ET: Continuing Claimsweek ended April 30 (1.368 million expected, 1.384 million in previous week)
We work (WE) is expected to report an adjusted loss of $0.72 per share on revenue of $768 million
Six Flags Entertainment (SIX) is expected to report an adjusted loss of $1.04 per share on revenue of $122.54 million
To confirm (AFRM) is expected to report an adjusted loss of $0.48 per share on revenue of $344.33 million
figs (FIGS) is expected to report adjusted earnings of $0.06 per share on revenue of $117.33 million
Toast Inc. (TOST) is expected to report an adjusted loss of $0.16 per share on revenue of $491.94 million
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