Chief Investment Officer,
Money Market Strategies and Distribution
The jobs market rebounded from Aprils worrisome report with May showing a gain in nonfarm payrolls of 559,000 just about double the April gain of 278,000. The unemployment rate also showed marked improvement, moving down to 5.8% from Aprils 6.1%. While this is obviously welcome news, the hard reality is that employers are finding it’s much easier to shut down than it is to open back up. Supply chain constraints, above normal unemployment benefits and childcare issues are all factors in hindering stronger job creation.
Despite the issues in the labor market, the U.S. economy is rebounding strongly as vaccine rates continue to rise and people look to return to a more normal way of life. Industries that had been virtually shut down, like air travel, hotels, concerts, and live sports are all showing remarkable upswings.
At its late April meeting, the Federal Reserve (the “Fed”) reiterated its determination to keep interest rates low for the foreseeable future. Inflation has moved well above the Fed’s long-term target of 2% due to April’s Consumer Price Index showing a rise of 4.2%. The Fed has stated that it views this as a transitory phenomenon. The Fed also continued its purchases of longer-term securities, however, some Fed policymakers have indicated that they believe the time for those purchases to begin to wind down is growing closer.
To date, the long end of the Treasury market has taken the inflation number in stride. The real test will come if the inflation data remains high and the Fed moves closer to tapering their bond purchases. In the short end, the problem is the opposite. Rates are hovering near zero, with the Fed Reverse Repo Facility seeing daily usage approaching $500 billion. The Fed will have to do a delicate balancing act to allow the economy to continue its remarkable recovery.
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