Overview: Major stock indices traded higher last week, despite a disappointing jobs report on Friday. In the U.S., the S&P 500 index was up 1.3%, with international developed stocks (MSCI EAFE) 2.6% higher for the week. In bonds, interest rates were lower, as markets reacted to the Federal Reserve reiterating its commitment to its accommodative monetary policy. The 10-year Treasury yield ended the week at 1.58%, down from 1.75% since the beginning of April. Worries that the economy is overheating and related inflation concerns may have been tempered by the latest jobs report, which showed the U.S. economy adding 266,000 jobs for April. This was well below consensus expectations of close to 1 million. In addition, the unemployment rate, which was expected to fall to 5.8%, increased to 6.1%. This week’s markets will get important data on inflation with data on consumer prices (CPI) due Wednesday, and producer prices (PPI) released Thursday. CPI for April is expected to increase on an annualized basis to 3.6% from 2.6%, with the ex-food and energy consumer price numbers expected to rise to 2.3% from 1.6%.
Commentary on the Jobs Report (from JP Morgan): The U.S. labor market added 266,000 jobs in April, a moderate improvement in employment but a sharp miss from consensus expectations. April was the one-year anniversary of the trough of the coronavirus pandemic recession, which saw jobs reduced by a record 22.4 million. April 2020 also saw the fastest wage growth in recent memory, with wages rising 8.2% year over year. The composition of the U.S. workforce sharply changed as a result of the pandemic, as millions of low-paid workers lost their jobs while relatively high-paid workers remained employed, telecommuting to work and even clocking in more hours than usual. This composition effect can help explain the spike in wages we saw in April 2020, but even when you remove this effect by holding sector weights and hours worked fixed at pre-pandemic levels, wage growth was much faster than average and remains above long-term trends. The U.S. has now recovered 63% of jobs lost from the pandemic and wage increases have remained robust, growing 0.7% month over month and 0.3% year over year in April. After adjusting for the underlying composition effect, we find that wages rose an impressive 8.0% in April on a percentage change over two years basis. While rising commodity prices and supply bottlenecks may cause inflation that is only transitory, robust wage increases may signal stickier inflation ahead. This is of crucial importance to bond investors, as sustained wage inflation could potentially pull forward the Fed’s timeline for policy normalization.
Weekly Returns and Data
Sources: JP Morgan Asset Management, Goldman Sachs Asset Management, Barron’s
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