Weekly Signal & Noise Filter

Updated Information Surface

More than anything, our current understanding of the information surface is informed by the Employment Day data.  While the headline print was a whiff, the informational edge can be found underneath the hood.

• Wage growth delivered encouraging news on the forward path of inflation.  Specifically, average hourly earnings delivered a soft print which is consistent with the soft-landing thesis suggested on these pages back in November of 2023.

• Over the last three months, AHE are up 2.8% compared to 4.8% YoY.  This data is consistent with 2% annual core PCE inflation. 

• With wage growth gradually declining, the Fed does not need further labor market loosening.  What this means is that a floor on labor market deterioration has been reached, and the Fed will prioritize holding on to labor market gains and under emphasize squeezing out the last few basis points of inflation ahead of schedule.

A variety of indicators of labor market tightness all point to a labor market that has reached a pre-Covid state.  The pre-Covid state is the labor market benchmark for two reasons.

• First it signals the final and complete recovery of post-GFC labor market high watermarks (such as low U3).

• Second, it accounts for the pandemic-related distortions.

h/t @jasonfurman