Markets Getting Ahead of Conditions?

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Today we saw a healthy jobs report with 196,000 added (177,000 expected) and a 13,000 upward revision to February. Manufacturing was still sluggish, reflecting perhaps the drop in ISM manufacturing seen this quarter. Average hours worked was up 0.1% (good for growth), while average hourly earnings were down 0.2% to 3.2%. Assuming a personal consumption expenditures (PCE) deflator inflation rate of 2% and the current productivity run rate of about 1.8%, there should be little pressure on margins.

While the GDP growth rate seems to be slowing towards trend, it’s not there yet and the market may be getting ahead of itself. The 2.25‒2.50% fed funds rate is still a bit below neutral, assuming the Federal Reserve’s preferred Laubach-Williams measure of a 0.8% real rate premium is correct, which with the PCE target of 2%, would imply a 2.8% funds rate would be nearer equilibrium. Therefore, the Fed still appears to be a bit accommodative at present, and even more so if a cut materializes over the next 12 months or so.

I think that a pause with a cut stance is premature, though I wouldn’t expect to see the Fed change its tone until more data come through the pipeline.

Please follow employment on page 63 of the Global Perspectives book.

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