Job Market Optimism

Posted March 10, 2022Job Market Optimism Collides with Credit Market Realities

This is how we repeat the 1970’s period of Stagflation

U.S Labor Department February Jobs Report – The U.S. Labor Department February jobs report on Friday, March 4, 2022, showed employers added 678,000 workers to their payrolls last month as adults joined the workforce at the highest rate in 7 months. The jobless rate fell from 4.0% to 3.8% in February, approaching 50-year lows of 3.5% (not seen since just before the pandemic).

The strong jobs report follows the record-breaking Consumer Price Index All Items (CPI) we reported on 2-weeks ago along with last week’s record-breaking Personal Consumption Expenditures (PCE), all but assuring the Federal Reserve will begin its policy tightening cycle with the March 2022 FOMC meeting.

Since these January CPI and PCE reports, Russia’s invasion of Ukraine has propelled WTI Crude Oil prices to highs not seen since prior to the Great Recession, when WTI reached over $130 per barrel in June 2008. While remains unclear whether the U.S. and Nato-aligned countries will ban the importation of oil from Russia pushing energy costs even further, one thing is for certain, the high cost of oil will begin slowing the U.S. and global economies down quickly.

The cure for inflation can be inflation itself, but not this time.

In many instances, the cure for inflation can be inflation itself. This holds true for “demand push” scenarios where inflation is driven primarily by excess demand that can be curtailed with higher prices while supply is held relatively constant. Unfortunately, global economies including the United States are facing a very different “cost-push” inflationary scenario where central bank policies in general, have less of an influence. Cost-push inflation is traditionally defined as a situation where supply costs increase or supply levels fall. Shortages or cost increases in labor, raw materials, and capital goods create cost-push inflation.

Sound familiar?

This is how we repeat the 1970’s Period of Stagflation – While the Federal Reserve is preparing to stabilize prices with its policy tightening cycle, we have begun shifting our focus toward the impact of a cooldown in personal consumption and overall demand while prices remain stubbornly high. An extended Russia/Ukraine conflict resulting in a U.S. and Nato ban on Russian oil imports would only exacerbate Federal Reserve policy efforts to cool demand. This extended period of higher energy costs will continue to fan the flames of cost-push inflation at a time when supply chain disruptions continue to reduce supply and pressure prices at all levels. This overall decline in economic activity and demand coupled with persistently higher prices is the exact scenario the Federal Reserve is aiming to avoid.

Hidden behind a curtain of mainstream media headlines focused on Russia and Covid, the credit markets are quietly ‘beginning’ to price in a recession to occur sometime within the next 12-18 months. The resulting economic impact of a decline in economic activity coupled with persistently higher prices would be a repeat of the 1970’s period of Stagflation.

U.S. Treasury Spread – 2-year vs. 10-year about to signal a recession in the next 12-18 months

SPG NL 03-10-22 1

The chart above illustrates what many investment professionals argue to be one of the best 12-18 month leading indicators of a recession to come, the 2/10-Year U.S Treasury yield spread. The 2-year yield rising into the 10-year yield at a rapid rate is a panic signal where investors flee, selling the short end of the yield curve. This leading indicator has correctly signaled (red circles) all 4 of the most recent recessions, only sending a false indicator one time in the early 1990s (blue square).

We will continue to monitor both equity and credit markets for indications of a recession to come and although we are not quite there yet, any further rise of the 2-Year U.S. Treasury Yield into the 10-Year U.S. Treasury Yield would be cause for growing concern.

In Summary

Last week’s record-breaking CPI All Items along with this week’s record-breaking PCE reflects pricing pressures for January 2022 relative to the same period a year ago. Since these January measurements, Russia’s invasion of Ukraine has propelled oil prices to 7-year highs. This most recent rise in oil prices will work through the entire economy over the next few months and will continue to pressure prices for all goods and services. The stage is clearly set for the Federal Reserve to begin its policy tightening cycle with the March FOMC meeting. The question at this point is are we going to see a 25-bps increase in the Federal Funds Rate out of the March FOMC meeting or something more aggressive like a 50-bps increase? We have not seen a 50-bps increase in the Federal Fund Rate out of a single FOMC meeting since May of 2000.

David Stryzewski, CEO |

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