The week in review

• ISM Manufacturing PMI: 60.7 (Cons. 65.0)
• ISM Services PMI: 62.7 (Cons. 64.1)
• Nonfarm payrolls +266,000

The week ahead

• April CPI
• Retail sales
• Industrial production

Thought of the week
The U.S. labor market added 266,000 jobs in April, a moderate improvement in employment but a sharp miss from consensus expectations. April was the one-year anniversary of the trough of the coronavirus pandemic recession, which saw jobs reduced by a record 22.4 million. April 2020 also saw the fastest wage growth in recent memory, with wages rising 8.2% y/y. The composition of the U.S. workforce sharply changed as a result of the pandemic, as millions of low-paid workers lost their jobs while relatively high-paid workers remained employed, telecommuting to work and even clocking in more hours than usual. This composition effect can help explain the spike in wages we saw in April 2020, but even when you remove this effect by holding sector weights and hours worked fixed at pre-pandemic levels, wage growth was much faster than average and remains above long-term trends. The U.S. has now recovered 63% of jobs lost from the pandemic and wage increases have remained robust, growing 0.7% m/m and 0.3% y/y in April. After adjusting for the underlying composition effect, we find that wages rose an impressive 8.0% in April on a percentage change over two years basis. While rising commodity prices and supply bottlenecks may cause inflation that is only transitory, robust wage increases may signal stickier inflation ahead. This is of crucial importance to bond investors, as sustained wage inflation could potentially pull forward the Fed’s timeline for policy normalization.

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