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A toxic mix: jobs miss and higher wage inflation
Summary: Everything points at stronger inflation ahead. However, the jobs miss highlights that widespread shortages might soon weigh on the recovery.
Today’s jobs report was expected to show a rebound from April’s unexpectedly low numbers. Yet, May payrolls added 559k jobs, well below the estimated 675k. At the same time, the unit labor costs have risen 1.7% despite forecasts were showing a fall of -0.4%. What is clear is that everything is pointing at strengthening inflation while the job miss highlights that widespread shortages might soon weight on the recovery.
Next week’s CPI reading are now in focus, and could push inflation expectation higher forcing bond vigilantes’ hands to drop US Treasuries. Although 10-year US Treasury yields have been trading in a tight range, it is a matter of time for them either to break above resistance at 1.70% and rise fast to 2%. We cannot exclude that if the Federal Reserve keeps dovish or it will increase accommodative measures due to an endogenous agent, yields could break below 1.50% to find support at 1.20% before resuming their rise.
Even though it is early to talk about stagflation, we believe that it is crucial for investors to consider this tail scenario. We have previously talked about this topic here, and highlighted how it is not that different from reflation for the bond market.