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Is This the Return of Stagflation?

In my view there is a potential disconnect between recent economic data suggesting weakness and the weekly jobless data suggesting strength.  Weekly jobless claims are around 15 year lows but recent statistics is projecting second quarter GDP around 1.0%.

Why is the increased number of jobs not translating into greater economic activity?  I think it is the result of a 35 year low labor participation rate (LPR).  Many have exited the workforce for a myriad of reasons that is perhaps skewing the weekly jobless claims.

If one is not in the workforce defined by not actively searching for work nor collecting unemployment insurance, that person is not included in the jobless count.  In other words there is a possibility that an entire cadre of potential workers do not exist for government counting purposes.  Last year I referenced BLS data stating ifthe LPR was around the same level as to when the recession “officially” ended, the unemployment rate would be over 10% versus 6.0%.

And then there is the disconnect in the bond market regarding economic activity.  Early yesterday, the bond market was little changed.  Selling however commenced pushing yields considerably higher.  Why?  There was little economic news.  Greece has “very limited” time to reach a deal with its creditors.  Can I argue the bond market fears the Federal Reserve is falling behind the proverbial curve because of oil’s nine week thirty five percent advance?

There is some suggesting a return of stagflation.  I don’t share this view but the argument is persuasive especially as it relates to climbing wage pressures because of a dearth of qualified applicants and rising home prices.

Commenting on yesterday’s market action, activity was quiet on muted volume.

Last night the foreign markets were up.  London was up 0.42%, Paris up 1.66% and Frankfurt up 1.92%.  Japan was up 0.68% and Hang Sang up 0.37%

The Dow should open nominally higher as the ECB stated its plans to bring forward asset purchases.  I rhetorically ask is the central bank stimuli trade getting old?  What are the unintended consequences?  The 10-year is up 9/32 to yield 2.220%.

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Ken Engelke

Chief Economic Strategist Managing Director

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