After US unemployment rose to nearly 15% (in April) I wrote a blog post forecasting unemployment would be back below 6% in November.
That got me a lot of attention and a lot of suggestions for bets on the numbers (I have accepted a lot of these wagers).
Today, we got the US labor market report for May. It is a massive confirmation on my bullish call on the US labor market.
US (non-farm) employment rose by 3 million in May and unemployment dropped to 13.3% in May from 14.7% in April. This is much better than the consensus expectation of an increase in unemployment to 19%.
The US recovery is well underway. The markets have been right and the-world-is-coming-to-an-end-pundits have been wrong.
Meanwhile market inflation expectations continue to rise as well and even though inflation expectations are still below where we where in late February it is clear that the US economy is not heading for deflationary depression.
This will in the end will be the shortest US recession on record.
The lockdown of the global economy has been a very bad and unplanned vacation, but particularly the US economy is recovering very fast from it.
In the past 12 years I more or less constantly been calling for further monetary easing both in the US and the euro zone as inflation expectations have remained below the Federal Reserve’s and the ECB’s 2% inflation targets.
However, I am now for the first time in more than a decade beginning to think that the risk is that the Fed could err on the upside in terms of overshooting its inflation target.
I am not too alarmed by this and and I am not overly concerned about a repeat of the mistakes of 1970s (yet), but I am beginning to think that we could see the Fed being forced to reverse cause a lot faster than most commentators are now predicting.
In fact I have over the past week (on Twitter) been arguing that we might even get a rate hike before the end of the year (yes, this year…) from the Federal Reserve.
Markets are of course not yet priced for that, but it is clear that is the direction in, which we have been moving in recent days.
US fiscal policy has been eased aggressively in response to the lock-down crisis and the Fed has at the same time acted decisively to eas monetary conditions. As the US economy is re-opened this easing – both fiscal and monetary will have to be reversed.
Massive government cash transfers have caused a major spike in growth in US personal incomes as the graph below shows.
Historically there has been a fairly strong positive correlation between changes in the Fed’s policy rate and growth in personal income.
However, recently the Fed has been cutting the policy rate and introduced quantitative easing, while personal income growth has spiked.
Obviously, the spike in income growth is a one-off and unemployment remains very high, but if I am right about my call on US unemployment then the Fed very soon will have to hike rates and it could be before the end of the year.
The timing of course will depend both on inflation expectations and on the speed of the recovery in the labor market, but for now I certainly think a rate hike this year is more than likely.
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Contacts:
Lars Christensen, LC@mamoadvisory.com, +45 52 50 25 06.
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The Market Monetarist 