Did February’s Job Openings Report Signal Rising Inflation?

Stocks slowed their climb this morning following yesterday’s blast higher. The Dow, S&P, and Nasdaq Composite all opened lower before trading mostly flat around noon.

Only reopening-sensitive stocks saw any significant gains, including cruise lines and airlines.

But to Chris Larkin, E-Trade Financial’s managing director of trading and investing products, there’s reason to expect a prolonged rally. And not just from travel-related companies.

“Vaccinations are rolling out at a record clip, and historic stimulus efforts from Congress have all paved the way for continued positive market momentum,” Larkin said.

Treasury yields are playing nice, too. The 10-year Treasury rate fell over 3% this morning, eventually settling at 1.66%. That’s contributed to a slight tech gain due to the sector’s dependency on low yields.

That’s not to say they’ll remain subdued, however, if the U.S. economy recovers further. Cleveland Federal Reserve President Loretta Mester doesn’t see the recent yield spike as a major hazard, given March’s impressive jobs and manufacturing data.

“I think the higher bond yields are quite understandable in the context of the improvement in the economic outlook. The increase has been an orderly increase,” Mester explained.

“So, I’m not concerned at this point with the rise in yields. I don’t think there’s anything for the Fed to react to.”

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The most immediate danger stemming from such a productive month is a sudden rise in inflation. But today’s lower Treasury yields are indicative of waning short-term inflation fears.

The Treasury markets seem to be ignoring the Bureau of Labor Statistics’ (BLS) February JOLTS Job Openings report, released this morning. Job openings surged by 268,000 to a total of 7.367 million in February, exceeding the Dow Jones estimate of 7 million by a wide margin. Openings are currently at a 2-year high.

The last time the U.S. had this many unfilled jobs was back in January 2019 (7.478 million). It was the second-highest number of open positions in American history.

What’s coming for the March report should prove less “eye-popping” given last month’s hiring blitz. But are these reports – both the jobs and jobs opening reports – suggesting that U.S. labor is overheated? Maybe, maybe not.

The Treasury markets are calling the BLS’s bluff on this one, and it’s because of where the job openings were measured. The food services and hospitality industries saw the biggest payroll gains in March. That’s where the February job openings report found most of its unfilled positions, too.

Are these quality, high-paying positions? They certainly could be, but if we learned anything from the post-Financial Crisis recovery, it’s that raw jobs numbers can’t be taken at face value.

Many high-skill positions were erased by a bursting housing bubble, only to be replaced (and then some) by far less desirable jobs. White and blue collars were swapped for fast food aprons at a surprising clip.

It looked good on paper. And to many, it was proof that the U.S. would quickly snap back in a few short years. In reality, though, it took nearly a decade for the damage to be undone.

And only after several rounds of quantitative easing, something the Fed (as well as investors) would soon grow to love.

There are plenty of reasons to be fearful of imminent inflation: mass liquidity, a near-historic spike in manufacturing, and unprecedented government stimulus have weighed heavily on skeptical traders.

But until the market sees payroll growth outside of the U.S.’s most beleaguered industries, future jobs reports are unlikely to tip the scales.

Even if, from a distance, the jobs data initially seems impressive.

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