May`s Employment Report to Top 300K

Job Market Tightening

The labor market is really starting to tighten and
Thursday`s initial jobless claims coming in at 297,000 for the May 10 week is
the lowest reading since May 2007. In several of the economic reports this week,
increased strength in the labor components also suggest increased hiring in the
manufacturing sector in the Empire State Manufacturing Survey coming in at a whopping
19.01.

This follows the strongest employment report since the
financial crisis where the economy added 288,000 jobs bringing the unemployment
rate down to 6.3%, with upward revisions for the previous two months as well.
So the jobs market is trending higher, and this is the best run of job creation
since the financial crisis.

Inflation Rising

The PPI and CPI reports this week also showed us that
inflation is really starting to stoke in the economy for the first time since
the financial crisis where it is actually showing up in the data the Fed
tracks. The PPI up 0.6 percent in April, following a 0.5 percent boost in March
with the CPI coming in at 0.3 percent rise for April while previously rising
0.2 percent in March. Expect the PPI to start bleeding into the CPI in the
coming months, and are we finally coming to that moment where inflation that
everybody recognizes starts showing up in ‘undeniable bluntness’ that finally
captures the attention of Wall Street and the Federal Reserve by showing itself
even in the artificially watered down metrics used to track inflation by the US
Government?

Inflation Inflection Point

We all experience inflation in our everyday lives, and
obviously it is being downplayed by Central Banks wanting to inflate the
monetary base, and thus monetize the debt by making its significance less in
relative terms. But are we finally coming to that point in Great Britain and
the United States where inflation really starts to take off and get out of
hand? I think once these minimum wage initiatives get implemented this is where
wage inflation and price increases really start taking off, and we are in store
for some shocking PPI and CPI reports over the next year. 

I think this is the one area where markets and the Federal
Reserve are really asleep at the wheel, under the radar we are starting to see
some forces come together to finally make a reality – the inflation problem of
being behind the curve in tightening mode that we all feared would show up one
day. By the time the Fed realizes inflation is a problem it is too late, and
because it has failed to rear its ugly head for five years on loose monetary
policy, the complacency factor is huge right now in the financial community.

Wage Pressures

I have seen wages rise significantly in my high skilled colleagues
who move from better paying opportunities to the next with fortune 500
corporations fighting over scarce talent, the only thing holding wages down
have been the entry level and middle class job categories. Once the minimum
wage is increased this puts upward pressure on wages in the next tier of
salaries, as increased responsibilities necessitate higher wages than entry
level, and so on up the wage scale. The analogy is the housing market where an
increase in first time buyers into the market puts upward pressure on the
housing market raising prices on the next tier as more home owners are able to
move up to the next tier, thus reinforcing prices in an upward slope.

I think raising the minimum wage is good for the economy in
the long run in this instance, but there is definitely going to be some growing
pains in terms of higher inflation, and a tighter monetary policy going
forward. I think the Fed can talk down the market all they want, but they are
going to be raising rates a whole lot sooner than their current rhetoric would
have Wall Street believe. Moreover, if they make the mistake of stalling rate
increases to appease Wall Street they will fall significantly behind the
inflation curve, and the pain in playing catchup in terms of monetary policy
pain will be far worse for the street.

May Employment Report in 2 Weeks

Thus watch the May employment report which comes out in two
weeks, I predict another very strong employment report that shows the trend in
job creation is much stronger than most on the street realize. I am looking for
a breakout number above 300k based upon how the initial jobless claims data is
trending of late, and some of the employment components in the economic reports.
There is little doubt that the job market is tightening, and wage pressures are
sure to follow, real in your face inflation is just around the corner, and the
Federal Reserve will be tightening monetary policy much sooner than most people
realize in the financial community.