Credit: Shutterstock photoWe end the first quarter of 2016 today. Within the month we’ve seen crude drop to $26, stocks declined 11%, and interest rates (the 10 year Treasury) dropped by more than 75 basis points. That was just shortly AFTER the Fed raised rates for the first time in nine years.
Still, for an investor that ignored it all, and will be logging in to check a quarterly statement, he will find broad stocks basically unchanged for the quarter, same for oil. But 10 year rates have finished the quarter down 50 basis points (1/2 percentage point) from the last price in December. What that investor missed was the near implosion of the global economy, again, due to the continued crash in oil prices. That’s why central banks stepped in along the way (rescuing stocks and oil), and that’s why government bond yields are pricing in a shakier global economic climate than we had three months ago.
Tomorrow the markets will be focused on the jobs report. Like Pavlov's dogs, regardless of the significance, market junkies will wring their hands over the payroll number -- as they do every month, even as the Fed has told them they've moved their attention elsewhere.
Why has the Fed moved the goal posts from jobs to inflation, wage growth and global stability?
jobs number
This chart above shows the monthly change in U.S. nonfarm payrolls (the benchmark for measuring job creation). You can see where we were pre-crisis, the depths of net job losses when the global economy was spiraling at the ugliest period of the crisis, and where we stand now. For the past five years, the U.S. economy has been adding jobs at a rate of about 200k a month. Looks good. The unemployment rate is below 5%.
But as we know the employment picture still isn't nearly as healthy as it was pre-crisis. With that, even though the jobs numbers look good, the Fed is troubled by weak inflation (as the rest of the world is). Weak inflation leads to a stall in the economic growth (slow growth, no growth, negative growth). And low inflation, now, is being driven, in part, by the weak fundamentals of employment. That's why the Fed's focus has shifted to the quality of jobs (i.e. underemployment) and wage growth (i.e. people are working for the same wages they were 20 years ago).
Here's an interesting chart on wage growth that could lead you to believe some aggressive wage growth is coming based on past economic expansions (which would drive inflation and hotter growth).
wages
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
