On the surface, U.S. economic data looks strong. Total nonfarm payroll employment during March rose by 303,000, significantly above the consensus estimate of 200,000. Total unemployment fell slightly to 3.8% from 3.9% while wages rose 0.3% for the month and by 4.1% over the prior year. However, as can be the case when one takes a closer look, headlines, although important, don’t tell the entire story. Although retail inflation as represented by the Consumer Price Index (CPI) has fallen to a “manageable” level of 3.5% y/y, achieving the Fed’s congressionally mandated target of 2.0% could prove a bit more difficult as shelter costs, which account for 42% of the CPI, remain elevated, having risen by 0.4% during March (5.7% y/y), its fourth consecutive monthly 0.4% increase. The labor data also requires a deeper dive. As is illustrated within the chart below, despite the robust overall data regarding the labor market, it is interesting to note that full-time employment declined while part-time employment rose. The number of layoffs also rose.
The above begs the question – what is the next move by the Fed? Given their dual mandate of achieving maximum employment along with price stability, the conflicting economic data has painted them into a tricky situation. Although we are seeing fraying at the edges in the labor market, historically a signal for the Fed to cut rates; we are also seeing inflation remain sticky, an indication that they should keep rates higher for longer. In our opinion, the Fed would be foolish to cut rates until inflation starts to regularly trend below 3%, especially when U.S. inflation remains an issue and the Chinese economy has begun to show signs of life.
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