The early May Employment Report came in at 428,000 added jobs in April, and the unemployment rate was unchanged at 3.6%.

Job growth was widespread, led by gains in leisure and hospitality, manufacturing, and transportation and warehousing. Another good report exemplifies the tightness in the labor market. Perhaps a little more surprising is that the labor participation rate declined from 62.4% to 62.2% as 363,000 people left the labor force. None of the aforementioned numbers would indicate that the economy is slowing down nor that the pressure on wage growth will alleviate. This, in turn, will further flame inflation that also continues to be fueled by challenges in the supply chain, higher overall logistics cost due to elevated oil/gas prices at the pump, and the ongoing war in Ukraine. The advance estimate of first-quarter GDP showed that the economy contracted by 1.4%. However, the details show that demand remained much stronger than the headline suggests. Growth was pulled lower by a sharp widening in the trade deficit and a pullback in inventory investment, shaving a combined 4% from headline growth. Abstracting from this, domestic demand expanded by a healthy 2.6%, a big improvement from its 1.5% pace in the second half of 2021. 

The Dow Jones, has taken it on the chin over the past month and dropped to the low 30,000s from around 35,000 last month. There is a multitude of reasons for the drop that range from Inflation fears, higher rates, lower corporate earnings due to supply chain issues, uncertainty, and general profit-taking. Higher rates also finally give the option for fixed income e.g., if you believe that inflation will return to 2% annually, then a 3% yield on a 10-year treasury looks good/safe in bear market. This is why we have seen frequent pullbacks once the 10-year crosses over the 3% then drops below 3% again. Oil has stayed somewhat stable month over month and is now sitting again at $100/ barrel down from $110/ barrel just a few days ago. Gold dropped about $150/ ounce to currently $1,837/ ounce. The US$ has further strengthened, especially against the EUR and is now sitting at EUR/ US$ 1.05. If you are wondering, yes that is bordering a new record low, if you want to call it that way, and it would be a good time to visit the old continent (England/GB and Switzerland are not part of the EUR). 

The Russian invasion of Ukraine is "creating additional upward pressure on inflation” and is likely to weigh on economic activity. COVID-related lockdowns in China are likely to exacerbate supply chain disruptions. With inflation running at 8.5% and the policy rate still at just 1%, consensus is that the Fed will keep hiking by 50 basis points at each of its next two meetings as it attempts to quickly get its policy rate towards a neutral level.  The aggressive path expected for the policy rate combined with the forthcoming rundown of the Fed's balance sheet has pushed U.S. Treasury yields higher. The U.S. 2-year and 10-year yields are currently up to 2.61% and 2.91%, extending the massive move seen over 2022.  Equity markets have suffered on the back of rising commodity prices and growing risks that higher policy rates could choke off economic growth. Though the Fed needs to raise rates, it has to be careful as it tries to engineer a soft landing, which is still very much in doubt that it can achieve it. 

All in all we still have a long way to go to get back to normal.  

But historically the U.S. economy has been resilient and has always come back. 

We just have to wait and see.


Pier Angelo was born in Italy, moved to England at the age of 17 and learned English at the Nelson School of English. He attended college and graduate school in Manhattan. In 2009 he founded SFGN with Norm Kent. Now he’s retired with his husband Tom and his Affenpinscher Cabbage. He still enjoys writing his column Off The Wall for SFGN.


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