THE BOTTOM LINE
The U.S. jobs report for May came in solidly above expectations, with the headline unemployment rate at 3.8%, a low last seen in April 2000 at the end of the tech boom.
Hourly earnings, the most closely-watched number from the report, rose 0.3% from April, and 2.7% year-over-year for the 12 months ended May 2018.
Growth in earned wages matters as a measure of potential downward pressure on corporate profits, a harbinger of future consumer demand, and the effect of both on inflation in general.
Because its mandate is to regulate inflation as well as support employment, the Fed scrutinizes each release of inflation-related data, be it producer prices, consumer prices, import prices, or wages in making its decisions to raise or lower rates.
The strong May report seems to support observers who believe that Fed will raise rates at least two more times by the end of 2018.
But direct measures of inflation tell a slightly different story.
The two the Fed watches most closely -- the Core Personal Consumption Expenditure Deflator and the Fed’s own measure of financial market signals about the level of inflation five years from now -- continue to converge on the Fed’s target rate of 2 percent.
The more volatile U.S. Treasury 5year-5year inflation breakeven rate is telling the same story, suggesting that in that segment of the market for U.S. Treasuries, the Fed has gained a significant measure of credibility in the years following the 2008 Great Financial Crisis.
The bottom line: markets and the Fed are pointing in roughly the same moderate direction for now, which potentially augurs well for financial markets overall over the coming months.
All data Source: Bloomberg, June 1, 2018.