Reverse Yen Carry Trade 2.0

A Looming Threat to Market Stability?

After two strong months of labor market growth, the number of jobs added in January dropped to 143K, a slowdown to be sure but still a relatively healthy level. The non-farm payroll report itself didn’t really deliver any surprises, but the biggest result is that it kept inflation on the radar. November and December readings were both revised higher and average hourly earnings jumped 0.5% month-over-month, well above expectations. While these numbers are generally positive for the long-term economic growth narrative, we’re starting to see real evidence of labor weakness in the manufacturing space. Construction job openings and manufacturing job openings are both at 5-year lows, strongly suggesting that labor demand is drying up. All in all, stocks retreated and bond yields moved higher to finish out the week.

The University of Michigan consumer sentiment report isn’t usually a market mover, but February’s report revealed some potentially important trends. The overall sentiment reading came in below expectations to its lowest level since July, but the biggest reveal was that consumer inflation expectations jumped from 3.3% to 4.3% in a single month. What happened all of a sudden? I don’t think it's a coincidence that the sudden jump in inflation expectations lined up with Trump entering the White House and immediately threatening to implement tariffs to Canada, Mexico, China and the European Union. Even though U.S. stocks are still hovering near all-time highs, gold continues to rally and TIPS have been steadily outperforming U.S. Treasuries for the past month. There are signs here that investors are starting to prepare themselves for inflation and sentiment readings seem to confirm that.