Labor Market, Inflation, and Fed Policy (with Tom Keene, Paul Sweeney)

Julia Coronado analyzes the labor market, noting conflicting signals: elevated layoff announcements but low unemployment. She says labor hoarding is over and the breakeven for labor supply is near zero. Inflation is coming from supply shocks (energy, Iran war), not wage growth. She expects a demand hit in late Q2/Q3 as real disposable income is negative. She believes Fed Chair Warsh will pursue reform, as signaled by his talk of regime change and hiring outside advisors.

implicit

NDX

Oil

Metals

USD

BNP Paribas 8.5
Investment Bank $600.00B
Julia Coronado 8.5

Labor Market, Inflation, and Fed Policy (with Tom Keene, Paul Sweeney)

rut

Coronado describes a 'low-amplitude' labor market with a sour consumer sentiment and a squeeze on consumers from negative real income growth. This suggests headwinds for small-cap and domestic-focused companies in the Russell 2000.

yields

Coronado expects inflation to accelerate due to energy shocks, which would put upward pressure on yields. The Fed is cautious but may need to act, keeping yields elevated.

Asks Julia Coronado to link tomorrow's jobs report to how the newly minted Fed chairman will think.

Tom Keene
Julia Coronado

There are conflicting signals in the labor market. Labor hoarding is behind us. We see elevated layoff announcements in tech but still a low unemployment rate. It is a low-amplitude labor market with more churn.

The breakeven rate of labor supply is close to zero (between 0 and 50,000), so we don't need many jobs to keep unemployment steady. Inflationary pressures are not coming from wage growth.
Asks if sub-100,000 non-farm payrolls is politically acceptable for the president or the Fed chairman.

Tom Keene
Julia Coronado

It is a new environment. An aging population (boomers retiring) and a drop in legal immigration are depressing labor supply. The economy is narrowly concentrated in AI investment and healthcare jobs, with little dynamism elsewhere.

Consumer sentiment is sour. It doesn't feel great even though it's stable in the aggregate.
Asks about inflation, specifically the impact of the Iran war on energy costs.

Paul Sweeney
Julia Coronado

May inflation data will show another burst of energy inflation and an acceleration in headline inflation. With a supply shock, inflation comes first, then a hit to demand.

The Fed is cautious. Real disposable income growth is negative, consumers are dipping into savings, and there will likely be a moderation in spending. Tax cuts will fade, squeezing consumers.
Asks if there will be a sea change in how the Fed communicates by Labor Day.

Tom Keene
Julia Coronado

Yes. When Chair Warsh talks about regime change, reform, and brings in senior outside advisors who wrote the chapter on Fed reform in Project 2025, you should expect him to put his money where his mouth is. This is not just bluster.

SignalTube

markets at a glance