U.S. Labor Market Continues to Strengthen, Wage Inflation Building

The U.S. economy generated 280k new jobs in the month of May, the most in five months, as the labor market continues to gain steam. Average hourly earnings were up 0.3% month-over-month, slightly above the 0.2% estimate. Year-over-year earnings climbed 2.3%, the most since August 2013. These gains are a welcome sign for the Federal Reserve, who has been looking for signs of wage pressures in the economy. The unemployment rate ticked up from 5.4% in April to 5.5% in May as more Americans jumped back into the labor pool to start actively looking for work. The underemployment rate remained steady at 10.8%. While the jobs report may give the Federal Reserve credence to pull off the lower bound of interest rates by year-end, several other components of the economic landscape have struggled to gain traction and may slow the Fed’s agenda. PCE, the Federal Reserve’s preferred measure of inflation, remains low at 1.2%, and the consumer remains cautious when it comes to borrowing and spending. Until we see marked improvements in overall levels of inflation and consumer spending, we don’t expect interest rates to break out of the 1.75-2.5% 10-year Treasury range we’ve been in for the last two years. However, should we see a notable move higher, bond investors should cheer as the income generation in portfolios should offset many of the negative effects from marginally higher interest rates. 

Sources: Bloomberg