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June 6, 1997
The unemployment rate for May was supposed to rise from an overheated 4.9% in April, and non-farm payrolls were supposed to rise by a strong, but tolerable 225,000 jobs.
At 8:30am EST this morning, the Labor Department announcedŠ unemployment fell again, down to 4.8%; and while May payrolls gained only 138,000 jobs, the 142,000 for April was revised to a 323,000 gain. Bonds and mortgages you would supposeŠ any sensible person would supposeŠ would be in a selling panic at such strength in the labor market.
You, sensible people everywhere, and your author, here, would be dead wrong.
Bonds are close to panic, all right, but a buying panic. Thirty year bonds are trading right at their seven-month low, 6.80%; and by Monday morning (if not later today), you are going to hear a lot more quotes beginning with "seven." The Dow is up 110 points -- so far -- today.
Inflation, as we know it, is usually a wage-pulled spiral of price increases or a cost-pushed affair that starts with rises in commodity and materials prices. As tight as the job market is, there is no sign of excessive growth in wages; and as hot as the economy is, there is no sign of price pressure in commodities. (And make no mistake, the economy is hot: the purchasing managers' index blew to a three year high, up three percent in May alone to 57.1%).
Whatever inflation's "usual" characteristics, there is no law of economics preventing inflation in the financial markets: money chasing stocks and bonds beyond any reasonable return -- except the hope that even more money will slosh in behind the latest buyer, and prices will rise more, and more, off into infinity.
Fearlessness in the markets is often a sign of financial market inflation.
Yields in the short term Treasury market say that traders have lost all fear of the Fed. The Fed funds rate is 5.50%; if the market fears Fed tightening, T-bill yields should be higher than the Funds rate. Instead, incredibly, 90-day T-bills have fallen under 5.10%, and 180-day T-bills have dropped under 5.25%.
Bills-under-funds says the markets believe the only topic of discussion at the Fed's July 2 meeting will be how soon and how much to ease.
The absence of fear (of the Fed, of inflation, of anythingŠ) is reinforced by a daily Greek chorus: Productivity! ("Wages may grow safely"), Global competition! ("Wages will stay under control"), Budget discipline! ("Austerity is good"), Computers! ("A new golden age").
Alan Greenspan's "irrational exuberance" speech last fall was not so much a declarative criticism of the stock market as speculation about how to detect a financial bubble, and how much damage a bursting bubble could do to the modern economy. Looks like we're going to find out.
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