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Macro Fatigue — In today’s tight labor market, not only is finding the right candidate for the job a tough nut to crack, but locking them down is expensive.
According to the Employment Cost Index, wages and benefits have grown more in the last year than any other one-year period in 38 years. To put this more succinctly, hiring good people is getting even more expensive.
At the same time, the cost of goods and services is through the roof; but inflation is taking money out of the workforce’s pocket at a pace faster than wage growth.
This is leading to the poor consumer sentiment numbers we have been seeing in recent months. Regular people aren’t happy with how far their dollar is going, and low- and middle-income families are feeling the financial squeeze in many facets of their day-to-day lives.
The inflation fatigue that consumers are demonstrating is an indicator that rough times could be on the horizon.
There comes a point in economic cycles when inflation gets so bad that producers slow production to moderate costs while consumers forego consumption when their perceived opportunity cost influences them to do something else. When this happens, the economy contracts and economic growth goes in the wrong direction.
Enter Daddy JPow. I don’t know about you, but I’m on the edge of my seat for Wednesday’s FOMC meeting and subsequent guidance from the Fed.
The market has gotten extremely hawkish in the last month. According to Refinitiv, there’s a 100% chance of at least four 50 bps rate hikes by the Fed through September. That’s, uh, aggressive tightening.
Treasury yields in the last month have seen their most aggressive steepening since 2009. This is kind of a big deal, as it shows that the broader market is coming to grips with the idea of higher inflation and rising interest rates.
If I were a betting man, I’d put my money on a 50 bps rate hike this week and then a kind of a “wait and see” period from the Fed. But we don’t gamble, and this isn’t financial or any other kind of advice.
If inflation actually is somewhat curbed following this second rate hike of the year, we will watch the Fed continue to slowly unwind its balance sheet and raise rates for the rest of the year.
If we don’t see inflation retreat, I’d expect Daddy JPow and the rest of the Fed to ratchet up the hawkishness in the coming weeks. Looking at this as a potential outcome, I’d argue that this isn’t priced into the markets just yet.
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