Payrolls (+356k on an average 3-month change) are currently running at a pace that far exceeds that consistent with a steady unemployment rate.
One recent NBER paper estimates that ‘breakeven’ payroll job growth is around just 65k per month. Even in the absence of contractionary monetary policy, a substantial slowdown in monthly payroll job creation was expected this year. There are no signs of it so far.
Breakeven inflation expectations were little changed across the curve on Friday: the market isn’t overly worried about inflation. The payrolls report led to a jump in real yields instead. With a credible Fed, structural factors pushing up on inflation should ultimately show up in higher real yields.
Real yields closer to 2% seem much more suited to this economy, given the rally in the stock market YTD. The 5- to 30-year portion of the nominal US yield curve should back up towards 4% this year.
To be sure, the y/y for average hourly earnings slowed to 4.43% in January. Software investment remains strong in the US. There is arguably scope for productivity improvements to cap unit labour costs. The jury is still out on this.
But with the US economy so far below the NAIRU, the risks for average hourly earnings remain tilted to the upside. Even if the moderation in average hourly earnings is sustained, this doesn’t necessarily mean the Fed will cut rates. It may simply be the case, that the economy can normalise at much higher nominal and real rates of interest.
