The Labor Market vs the Bond Market

The tightening labor market and increasing confidence we’ve been seeing in the surveys are starting to have an actual impact on people’s salaries. Things are improving beyond just the top few tiers of US workers.

According to Reuters: “U.S. labor costs recorded their largest increase in more than 5-1/2 years in the second quarter, a sign that a long-awaited acceleration in wage growth was imminent. The Employment Cost Index, the broadest measure of labor costs, rose 0.7 percent after increasing 0.3 percent in the first quarter, the Labor Department said on Thursday. That was the largest gain since the third quarter of 2008.”

Labor costs are up 2 percent year-over-year as of June. This is not an outrageous, inflationary rate of growth, it’s normal for a recovery.

What may be abnormal, however, is the Fed’s continued pressure on the gas pedal in light of these conditions. Peter Boockvar, whohas been critical of the Fed’s largesse for awhile, is pointing toward continuing claims as evidence that the Fed is too easy at this stage in the game. “Initial Jobless Claims totaled 302k, 2k more than expected but last week was revised down by 5k to 279k. This brings the 4 week average to below 300k for the first time since 2006 at 297k. Register that for a moment, the lowest 4 week average in claims since 2006 and we have the fed funds rate at zero.”

By the way, if you wanted to know whether or not peak corporate profit margins would be sustainable forever, you’re probably going to get your answer soon if this keeps up.

In the meantime, the bond market remains in denial. Yields on the ten-year Treasury don’t seem to want to lift in a meaningful way, regardless of the meaningful improvements in the labor market (and its confirmation from Q2’s GDP report yesterday). Even with the Fed pulling back fixed income market purchases steadily (they’re down to just $25 billion in QE this month), every bond sell-off is quickly bought.

For now.