Jobs are on a high, but inflation is still lagging behind.
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Hi investors,
The Fed hiked interest rates for the eighth time earlier this month and warned of ongoing increases needed to bring down inflation.
That same week, the jobs report for January showed the US unemployment rate fell to a 53-year low. This is powering wage gains and, in turn, boosting consumer spending, which might explain why consumer prices in the US rose more than expected last month.
Let’s dive, shall we?
Weekly Round-up
?? Connecting The Dots
The Fed has two responsibilities: keep employment full and inflation around a stable 2%. But the central bank can only do half a victory lap because January’s jobs and inflation reports painted two very different pictures. The first was an absolute blowout: 517,000 jobs added (more than double the month before and shattering economists’ estimates of 187,000), a 53-year low in the unemployment rate, and strong wage growth that was higher than expected.
But while promising for workers, the jobs report was probably too hot for the Fed’s liking. The central bank has been aggressively increasing interest rates in an effort to dampen consumer demand and bring down inflation. Problem is, inflation isn’t coming down as fast as hoped. Data this week showed consumer prices increased by 6.4% in January compared to the same time last year. That was only slightly lower than the 6.5% pace recorded the month before, and economists had expected a bigger deceleration to 6.2%. On a month-on-month basis, consumer prices climbed by 0.5% in January – the most in three months and a steep acceleration from December’s 0.1%.
One of the reasons why inflation isn’t falling fast enough goes back to the red-hot labour market, which has bolstered wages and allowed many Americans to keep on spending – even as borrowing costs rise and inflation stays elevated. In fact, separate data this week showed retail sales increased 3% last month from the one before – their biggest gain in nearly two years and easily topping forecasts of 1.9%. Those numbers aren’t adjusted for inflation, meaning that consumer spending outpaced the 0.5% increase in consumer prices for the month by two and a half percentage points.
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?? Takeaways
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1.?Inflation is likely to stay high for a while.
On top of a blistering labour market, China’s reopening could fuel inflation in the US and the world over. Bloomberg Economics, for one, reckons China’s economic growth will almost double this year to 5.8%, and that could lift global inflation by close to a full percentage point toward the end of 2023. But even putting the labour market and China aside, history tells us that spikes in inflation take a long time to disappear. A study by Research Affiliates looked at surges in 14 developed countries over the past 50 years: when inflation crosses above 8% (the level reached by most of the developed world last year), falling back to 3% usually takes six to 20 years, with a median of over ten years.
2. Interest rates will probably climb to a higher peak than previously thought.
But that doesn’t guarantee a repeat tumble for stocks. That’s because the marginal impact on stock valuations of a one percentage point increase in rates is far less when you start at today’s levels of around 5% in the US, versus when you start from zero. Put differently, rates rising from 0% to 1% hits stock valuations way harder than rates going from 5% to 6%.?
?? Also On Our Radar
The US securities regulator proposed new rules this week that would force investment advisors to secure clients’ crypto assets with qualified custodians. The idea is to build better safeguards around investors’ assets and comes after the collapse of several high-profile crypto companies last year, which revealed that customer funds were not as safe as had been advertised.
Light & Spicy
Earnings reports this week
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