E-piphany

Here are my post-Employment tweets. You can follow me @inflation_guy.

• Pretty weak NFP number since the payrolls figure (169k) plus revisions (-74k) is way worse than forecast. Decline in rate irrelevant.
• Actually think Fed spent so much time talking about starting taper that they may do it anyway, but have an excuse now to delay.
• Nothing like a weak NFP number to help the beleaguered bond market. Bounce may temporary but in Sep you don’t wanna fade rallies.
• I don’t watch it much, but avg hrly earns at 2.2% is highest since brief pop to 2.3% in mid-2011. Y do people hate TIPS here?

So 10-year note yields broke above 3% overnight, the highest level since 2011. More importantly, 10-year real yields had been approaching 1% (reaching 0.93% overnight) as fear-of-taper has investors quite reasonably fleeing fixed-income.

I said above that I don’t look much at average hourly earnings. This is because the evidence is that wages follow prices, rather than prices following wages in a mythical “wage-push” inflation. Moreover, we can intuit that this is the case because if wages led inflation, we would really like inflation since we would tend to see our wages increase before inflation did…we would be doing better all the time, rather than worse. In fact, we know intuitively that is wrong.

With that giant caveat, it is worth pointing out that average hourly earnings are above median CPI (which right now is a better measure of the central tendency of inflation because of the large one-off effects in medical care) by the most they have been since 2011 (see chart below, source Bloomberg).

The unemployment rate declined, but only because the Participation Rate plumbed a new post-Carter low at 63.2%. You have to go back to July 1978 to find participation rates this low, and back then there were a lot fewer women in the workforce.

All in all, this is a pretty ugly employment report, but the FOMC has carefully lined up its doves and even gotten a few hawks to say that tapering ought to begin this month. I suspect it is still likely that they start down that path, but probably the first steps are fairly small. Still, given how far rates have risen and the possibility that this will lead to some “taper: off” talk, and given the strong seasonal tendency for rates to decline in September and early October, I would not want to fade a bond market rally.