More Big Rate Hikes on the Way, as Recession Warnings Flash

Monthly non-farm payrolls came in hot today, alongside a robust employment report, causing markets to swoon as the likelihood of a Fed pause diminishes. Everyone now believes that the Fed will continue its path to curb-stomp inflation after a too-long period where the central bank was asleep at the wheel – calling rising inflation “transitory.”

Non-farm payrolls came in at 263,000 when expectations sat at 250,000. While the metric has been moderating it simply wasn’t enough to calm markets. It did not help that unemployment came in at just3.5% when forecasters had it at 3.7%, thus indicating the job markets continue to be fairly robust.

CI received a comment from Paul Craig, portfolio manager at Quilter Investors. The UK-based investment firm caters to affluent and HNW individuals, handling £98 billion in customer assets. Craig said the US jobs report came in better than expected, and unemployment went down, so we remain in a search of a “middle ground.”

“In normal circumstances, a better-than-expected jobs report would be considered a good thing and a likely catalyst for rise in equity markets. But these days, we live in a parallel world where good news is bad, and bad news is good as investors try to anticipate the US Federal Reserve’s next move and whether or not they will temper their hawkish stance, stated Craig. He added that it is clear we are on course for another significant interest hike from the Fed with the market pricing in a 75bps increase at the next FOMC meeting.

“This report will simply solidify its hawkish rhetoric even if that translates into setting policy by looking in the rear-view mirror as it looks to tame the inflation beast that it has lost a handle on. Equities will naturally react negatively as a result, stoking the volatility we have seen of late as geopolitical issues once again come to the fore. With midterms around the corner and OPEC confirming it is to cut production, consumers will continue to feel the financial pain as they head to the polls.”

Craig said it remains to be seen how long the job markets can maintain this strength.

 “The rate of growth is slowing and recession warnings continue to flash. Investors are anticipating a shallow contraction coupled with a sharp fall in corporate profits. This is likely to have a significant impact on the employment market and we would expect to see quit rates beginning to decline as employees start to see that the grass is perhaps greener on the side they are already standing. This could also take some of the sting out of the wage growth tail.”

The Fed’s reputation has been tarnished due to its complacency in managing inflation while hanging on to the transitory mantra that was politically expedient but wrong. It has been unfortunate that the current Administration has been battling the Fed by spending trillions of dollars in fiscal programs that fuel inflation. Not what we need right now. The Fed is looking to regain its inflation-fighting cred, but this will probably mean some near-term pain for everyone.


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