After an initial surge higher, shares are trading lower on Friday as I write this in response to a mixed December jobs report. Payrolls jumped by 252,000, which was slightly better than expected. But the unemployment rate narrowed to 5.6%, tighter than expected and reflective of a job market that is tightening quickly.
While the jobs report had good news for working Americans (business surveys are pointing to shortage of qualified workers ahead of expected pay raises), the market wasn’t happy with the news. Why? Because not only does it keep the pressure on the Federal Reserve to end its 0% interest rate policy — but it jeopardizes corporate profitability as well.
Indeed, at 5.6% the unemployment rate is near the Fed’s 5.2%-5.5% estimate of long-run unemployment. It’s also very near the Congressional Budget Office’s estimate of the “non-accelerating inflation rate of unemployment” — also known as the natural rate of unemployment — at 5.5%.
This means that meaningful wage inflation should soon start materializing — something that will crimp corporate earnings, as labor costs are one of the largest single expense items.
This is being held back, at the moment, by the significant number of Americans that have left the workforce. The labor participation rate is down to late 1980s levels while the employment-to-population ratio is at 1984 levels.
At the current pace, the unemployment rate will drop to 5% by this summer — which would represent the level the Fed expected at the end of 2016.
Jobs Report — Outlook
If this happened, officials would have little excuse to not start raising short-term interest rates for the first time since 2006. That expected raise is what has stocks swooning in mid-day trading. The end of the greatest experiment in monetary policy is not going to be a smooth, easy transition … especially since it’ll likely be accompanied by the end of a 30-year bull market in bonds.
The truth is, pretty much every professional on Wall Street has operated in an environment where bonds pretty much only went up in price (and down in yield) while all the fresh-faced Millennials have never experienced a Fed rate hike campaign. Within the next few months, a sea change will hit all of them.
In response, traders are moving into safe haven assets such as precious metals and Treasury bonds as crude oil continues its slide. The Market Vectors Junior Gold Miners (GDXJ) I recommended to Edge subscribers on January 6 is up nearly 5% already — with room for much more as markets recoil from the idea of pricier money.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters.
