Fed Stance Unaffected by Jobs Report as Treasury ETFs Climb

With a much-anticipated jobs report out of the way on Friday, investors are breathing a sigh of relief, as the Federal Reserve is unlikely to begin tapering, despite the strong payroll data.

Hiring continued in May, with the addition of 559,000 new jobs, but that figure still wasn’t enough to compel the Federal Reserve to discuss tapering back its bond purchases, which have been ongoing for more than a year now.

Last week, the headline PCE index surged 3.6% year over year and 0.6% from March, sparking concerns among analysts.

“Inflation pressures might get worse before they get better,” wrote Jefferies economist Aneta Markowska, who pointed out that declining retail inventories could push prices higher. She added that a transition in consumer spending from goods to services ultimately should pull inflation pressures lower.

Friday’s Labor Department report on new payrolls was under the 671,000 anticipated, yet also was not anemic enough to signal a break in the surging economic recovery, although it does suggest there may be some concerns of a worker shortage and jobs mismatch.

Stocks and ETFs like the SPDR Dow Jones Industrial Average ETF (DIA) and SPDR S&P 500 ETF Trust (SPY) climbed amid the news, while Treasury yields eventually headed lower, as bond prices gained traction. The benchmark 10-year yield fell to 1.58%, with yields moving contrary to price. The move sent the ProShares UltraShort 20+ Year Treasury (TBT) lower by over 2%, while helping the iShares 25+ Year Treasury STRIPS Bond ETF (GOVZ) climb half a percent.

John Briggs, NatWest Markets’ global head of desk strategy, said the report was “Goldilocks” for risk assets, and “not too hot to bring in the Fed and not too cold to worry about the economy.”

“You’re in a zone where it’s OK. It’s better than last month,” Briggs said. “It’s not like it’s 1.2 million, and it’s not going to scare us for the Fed. The next event is next week’s CPI, and people are going to worry about that being strong.”

May’s job gains were “solid” but not enough to change the direction of monetary policy, Cleveland Fed President Loretta Mester also told CNBC.

“Bottom line, I would like to see further progress than where we are right now,” Mester told CNBC’s Steve Liesman during a live “Squawk on the Street” interview Friday.

Despite the improvement, Mester said the payroll increase does not warrant the “substantial further progress” benchmark the Fed has set before it will adjust pandemic-era monetary policy.

“I view it as a solid report,” she said. “I view it as progress continues to be made on the labor front, which is very good news. But I’d like to see further progress.”

The Fed has maintained benchmark short-term borrowing rates close to zero and continues to purchase at least $120 billion of bonds each month, even amid the reestablishment of the almost 15 million jobs that were lost during the pandemic and an unemployment rate that has fallen to 5.8%, after reaching double digits last year, the highest since 1948.

The Fed seems to be targeting a pre-pandemic unemployment rate, which was closer to was 3.5%.

“We want to be very deliberately patient here, because this was a huge, huge shock to the economy,” Mester said. “We see now we’re coming back, but again it’s easy to shut down an economy, it’s much harder to have it come back.”

“We’re looking for and basing our policy decisions on outcomes, how close are we to getting back do our dual mandate goals, what is the economic data telling us. Rather than just having a forecast, we want to see it in the data,” she added.

In addition, Mester noted that she is not too disturbed by the recent inflationary pressures that have been seen in the CPI and PCE data, seeing the jump as only temporary due to short-term forces at work in the marketplace.

Still, for ETF investors concerned about inflationary pressures, the Quadratic Interest Rate Volatility and Inflation Hedge ETF (IVOL) is one fund to consider, as it may act as a hedge against inflation.

IVOL seeks to hedge the risk of increased fixed income volatility and rising inflation and to profit from rising long-term interest rates or falling short-term interest rates, while providing inflation-protected income. The fund invests in a mix of TIPS.

“While the surge in inflation over the past year was driven in part by base effects, given last year’s economic lockdowns, we are seeing prices rise for all sorts of things, like lumber, auto parts, semiconductors, groceries and gasoline,” said Nancy Davis, founder of Quadratic Capital Management.

“I expect inflation data to remain elevated over the coming months, given the widespread reopening of the economy, shortages or delays in many manufactured goods and a dovish Federal Reserve that is willing to let inflation run above its 2% target,” Davis added.

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