June 9, 2021
Tomorrow: Consensus is looking for headline CPI to be up +0.4% month-over-month and +4.7% year-over-year. Core CPI is expected to be up +0.5% and +3.5%, respectively. The set-up seems net-positive for growth/Tech equity sectors with a firmer print likely dismissed as ‘transitory,’ while an inline/lower report becomes evidence of peak inflation. Bond markets should react in a similar fashion with a higher print leading to little/no material increase in yields, while an inline/weaker number could have 10-year yields testing ~1.45% again. We’d expect to see significant bond selling at that level as we did a month ago with ~1.45% acting as a technical floor in yields. Bond markets are far more interested in employment data as the Fed has recently identified labor market normalization a prerequisite for tapering asset purchases.
Next: Disappointing payroll gains over the last two months have been attributed to labor supply issues. The monthly JOLTS report from yesterday had job openings at an all-time record and wage price pressure has been evident in both April and May. As we prepare for future Nonfarm payroll reports, it’s important to consider the September expiration of supplemental federal unemployment benefits, particularly among low income jobs, which show the greatest number of openings. Wage pressure will likely begin to decelerate and payrolls accelerate if business owners expect an increase in supply. The combination would take bond yields higher by confirming expectations for another leg of improved macro data. Some see the recent deceleration in macro data as evidence of late-cycle dynamics. But a deceleration should be expected as an economy transitions from hyper-growth to a more sustained cycle based on improving labor markets, accommodative policy, healthy consumer and strong corporate fundamentals.