April Jobs Report Suggests Inflation Will Remain High

Stocks fell slightly this morning in yet another volatile trading session. The S&P opened for a moderate loss before plunging to just above its 2022 low, set last Monday. Then, around 11 am EST, the broader market index rallied to trade flat on the day.

Enthusiasm remained subdued despite Wednesday’s massive post-FOMC reversal into the close.

“The widely anticipated relief rally seen in equities and bonds post the ‘less hawkish than feared’ Fed on Wednesday was short-lived,” noted Barclays strategist Emmanuel Cau.

“Although aggressive 75bp hikes going forward may be off the table, the implied policy tightening cycle ahead is still very hawkish, in our view. Unless surging inflation quickly reverses its course (watch US CPI print next Wednesday), central banks may have no other choice than slowing growth to slow inflation and stay credible.”

In addition to saying that a 75 basis point rate hike wasn’t seriously being considered, Fed Chairman Jerome Powell added that the Fed would attempt to guide the US economy toward a “soft landing.”

The April jobs report, released today, suggests that the Fed will have a hard time achieving that goal. 428,000 payrolls were added last month according to the report, beating the 400,000 job estimate.

However, the labor participation rate remained unchanged, sitting idle at 1.2% below its pre-pandemic level despite last month’s jobs beat.

“If we are to get a soft landing, we are going to have to see a recovery in participation at a pretty rapid clip,” said Abrdn’s senior economist, Luke Bartholomew.

Rising labor participation would, in theory, help assuage wage inflation, thus bringing headline inflation lower.

Sadly, participation has yet to show any signs of reaching its pre-Covid rate. And with oil prices on the rise once again, the inflation deceleration everyone assumed would be coming may not arrive as expected.

“OPEC+ announced another 432k barrels/day increase in oil production for June but with OPEC10 (those with quotas) trailing by 800k barrels/day in April and Russia and Kazakhstan being the other laggards, the group is currently not able to deliver the barrels they have targeted,” said Ole Hansen, Saxo Bank’s commodity strategy chief.

“In addition, the EU ban on Russian oil imports and a surprise US announcement about starting to refill its [strategic petroleum reserves] already this autumn are also underpinning the price.”

WTI crude, the US benchmark for oil, jumped above $110 a barrel this morning for the first time since March due to constrained supply. Brent crude, the international benchmark, hit $113.

As we warned last month, the US’s release of its strategic petroleum reserves (SPR), which was intended to bring down the price of oil, is actually causing it to climb instead, as the US now needs to buy oil to refill those reserves.

So, while the decrease in oil prices last month was encouraging, it was ultimately just a temporary dip, driven by an SPR release that did nothing to fix the broader oil supply problem.

That has investors worried (for good reason) that the Fed’s fight with inflation will eventually warrant a 75 basis point rate hike in the near future, even if Powell said Wednesday that it was off the table – something that’s probably not true considering just how “sticky” inflation continues to look amid rising oil prices and a persistently low labor participation rate.


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