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Morning Brief: May jobs report anticipation

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Myles Udland breaks down the morning brief, which details how vital the May jobs report in determining transitory inflation will be and if the Fed will be compelled to change its stance in the market.

Video Transcript

JULIE HYMAN: --going to move up our Morning Brief here this morning, in light of the jobs numbers that we just got and the jobs numbers that we're waiting for. As I mentioned, we saw jobless claims falling to a post pandemic low, 406,000. 425,000 is what was estimated. We saw 444,000 the prior week. Of course, the big one is going to be the May jobs report, which we get a week from tomorrow.

And Myles, in the Morning Brief, you know, all of us have been doing this long enough to know the old adage, sometimes good news is bad news, bad news is good news in the eyes of the market, as they sort of extrapolate what the Fed is going to do on the back of this. As you wrote this morning, bad news is probably going to be bad news, if it happens this time.

MYLES UDLAND: Yeah. And look, I think, you know, and we have Greg Daco coming up in just a minute, and I'm sure he'll outline for us why it's likely that there will be a big rebound in hiring in May. But what April's report clearly reflected were just chokepoints within the labor market right now, an inability for the demand for labor to be matched with the supply of available labor. And with 8 million people out of work, we know that there is indeed supply out there.

And kind of the point this morning is that in general, more job growth means better-- means we're further along in the economic cycle, which again, all else equal, would suggest that the Fed, whatever its stance might be at the time, is likely to get tighter, rather than looser, on the back of a continually growing economy.

But I think, and to the point that we highlighted in the Brief this morning, which comes to us from Ian Shepherdson over at Pantheon Macro, is that the Fed's point is that there needs to be huge job gains so that they can reiterate the need for them to remain easy with policy. Big job gains are the assumption at this stage in the recovery with this many people out of work. If there were another, call it, 100,000, 150,000 jobs added in May, then, what Shepherdson's point is, is then the Fed might start to worry about wage inflation and inflation pressures spreading more broadly through the economy.

And so while you would expect, all else equal, weaker job growth to be associated with easier monetary policy, in this instance, were that to materialize, a softer jobs market could be a sign of the need for tighter policy, should inflation then materialize. Now I think the data that we've been getting, especially on the claims front, and you look at the actions that a number of states have taken to no longer participate in the enhanced unemployment benefits, all of that suggests that we're going to get a couple of very big jobs numbers and the Fed is likely to be able to say, look, inflation pressures are transitory, the economy is still repairing itself. We still have a long ways to go to get folks back into the labor market. We don't need to talk about changing our policy stance.

But the market, in general, is going to see a big jobs number as a sign that rate hikes are closer than they might otherwise be. So the market might not like a big jobs number, but the Fed probably would like a big jobs number. So you could be in this situation where we're doing the whole dance. I mean, honestly, I kind of lost whether we're doing good news is good news, bad news is good news. I think, Sozzi, I think the point is that good news next Friday could be bad news for the markets, but it should be good news for the markets. Right?

BRIAN SOZZI: Right. Right, Myles. It should be good news. It should be good news, I'm just trying to follow your, follow you there. But you know, it actually might be bad news, if we get a stronger than expected jobs report. And all the data, I would say, over the past week and a half, two weeks suggest we should get a lot better jobs report than we got last month. But Myles, I am curious on what you think about some of this tapering talk we have gotten this week, certainly from the Fed and Randy Quarles, most notably. Because it's almost as if they are putting out some trial balloons here ahead of that potentially strong jobs report.

MYLES UDLAND: Well, look, I mean it showed up in the Bank America fund managers survey, that taper tantrum fears are now starting to rank among the worries that investors have. But you know, everything that investors worry about, it seems to me it's all just benchmarked to things that have happened in past cycles and doesn't particularly take into account what's happening in this cycle. So investors are worried about inflation overheating and about a taper tantrum happening.

So to your point, Sozzi, I think the Fed, trial ballooning is probably a fair way to say it. They're trying to make very clear they are not going to create another taper tantrum, or they're going to try their very best to not create another temper tantrum. And I think you could probably argue, they're more focused on that than they are even about inflation, mostly because I think the Fed is very highly convicted that inflation pressures are going to be transitory and that they can just wait this out. You know, this spike that we're seeing here, they can wait six months and it's going to start going the other direction and then their policy stance, in response, their policy stance of not changing policy, will end up being vindicated.

JULIE HYMAN: And by the way, tomorrow morning we also get the latest read on their preferred gauge of inflation, the so-called PCE deflator.

I also, you know, the other component of all of this, as you've also written about, Myles, is that, you know-- and Sozz, I know you said the latest data points show, point to a strong jobs report, I mean, I guess, we showed this last time, it's pretty hard to predict right now. And it's not like it's any easier to predict for the Fed. So you have to throw that sort of wild card into it too, that it's a really kind of murky environment and difficult to predict environment.