5/3/2019 Weekly Update: Is the Phillips Curve Dead?

5/3/2019 Weekly Update: Is the Phillips Curve Dead?

by David Rasmussen on Jun 7, 2019

Weekly Recap                                                                        

S&P 500                +0.23%

10 Year Treasury   -0.20%

Gold                      -0.59%

Volatility              +2.36%


Weekly Update: Is the Phillips Curve Dead?

Happy Friday! This week contained two market catalyst.  The first was the Federal Open Market Committee meeting that concluded on Wednesday.  As expected, the “Fed” left rates unchanged as they had previously signaled.  Markets were particularly interested in how Jerome Powell would handle questions about stubbornly low inflation during the press conference post meeting.  Mr. Powell used the word “transitory” several times to explain away the reasons for low inflation.  He basically indicated that the Fed is likely to stand pat rather than bend to the market and lower rates.  Before the meeting the market had priced in a rate decrease later this year.  The market interpreted his comments as hawkish and the S&P 500 sold off roughly 1% while the VIX index, a benchmark for market volatility, jumped 30% intraday.  This was the first bought of equity market volatility that we have experienced for several weeks and it was short lived.

The second catalyst was the jobs report this morning.  The report was great news and bolstered the equity markets into the black for the week while volatility levels quickly subsided.  The US Economy added 263,000 jobs in the month of April. Summary statistics follow:

Released On 5/3/2019 AM For Apr, 2019  Nonfarm Payrolls • MN change  Unemployment Rate • Level  Private Payrolls • WM change  Manufacturing Payrolls • WM change  Participation Rate • level  Average Hourly Eamings • WM change  Average Hourty Eamings • Y,'Y change  Av Workweek • All Employees  196.000  3.8%  182,000  .6000  63.0 %  0.1%  3.2 %  34.5 hrs  Prior Revised  189,000  179.000  o  Consensus  180,000  3.8 %  178,000  63.0%  0.2 %  34.5 hrs  Consensus Range  160.000 to 240.000  3.7 to 3.8 %  160.000 to 216,000  .6,OOO to 20.000  62.9 % to 63.0 %  0.1% to 0.4 %  3.2 % to 3.5 %  34.5 hrs to 34.5 hrs  Actual  263.000  3.6 %  236.000  62.8 %  0.2 %  3.2 %  34.4 hrs

Source: Econoday.com

What really goosed the equity markets today was, perhaps, the “goldilocks” nature of the report: strong job growth without upward wage pressure.  Corporations have somehow managed to keep their costs of labor low despite the dwindling pool of unemployed potential workers.  In previous economic cycles the laws of supply and demand have usually dictated that a lower supply of workers led to a higher cost of labor.  This relationship is known as the Phillips Curve by wonky economists.  The following chart depicts this relationship graphically during the last decade that the unemployment rate reached 3.6%, the 1960’s:


Source: Bureau of Labor Statistics

As you can see there was a clear reaction function:  lower unemployment equaled higher inflation.  This reaction function has broken down in modern times.  The unemployment rate (graph below) has steadily declined while inflation has hovered at or below 2% since the financial crises. 

Source: Econoday.com

The FOMC has a dual mandate: maximize employment while keeping inflation low.  Historically this has been a paradox.  Achieving one goal is usually at the detriment of the other.  A yin vs yang.  This was economics 101.  A question to pose during your weekend social gatherings: Is the Phillips Curve Dead?

Have a good weekend.

Thanks for reading,

Zach and Dave

Calibrate Wealth





All opinions are subject to change without notice. Neither the information provided nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Past performance is no guarantee of future results.  Tax laws are complex and subject to change. Calibrate Wealth LLC, does not provide tax or legal advice and are not “fiduciaries” (under ERISA, the Internal Revenue Code or otherwise) with respect to the services or activities described herein except as otherwise provided in writing by Calibrate Wealth. Individuals are encouraged to consult their tax and legal advisors (a) before establishing a retirement plan or account, and (b) regarding any potential tax, ERISA and related consequences of any investments made under such plan or account.


This material does not provide individually tailored investment advice. It has been prepared without

regard to the individual financial circumstances and objectives of persons who receive it. The strategies

and/or investments discussed in this material may not be suitable for all investors. Calibrate Wealth

recommends that investors independently evaluate particular investments and

strategies, and encourages investors to seek the advice of a Financial Advisor. The appropriateness of a

particular investment or strategy will depend on an investor’s individual circumstances and objectives.

Investing in commodities entails significant risks. Commodity prices may be affected by a variety of

factors at any time, including but not limited to, (i) changes in supply and demand relationships, (ii)

governmental programs and policies, (iii) national and international political and economic events, war

and terrorist events, (iv) changes in interest and exchange rates, (v) trading activities in commodities

and related contracts, (vi) pestilence, technological change and weather, and (vii) the price volatility of a commodity. In addition, the commodities markets are subject to temporary distortions or other

disruptions due to various factors, including lack of liquidity, participation of speculators and

government intervention.


Foreign currencies may have significant price movements, even within the same day, and any currency

held in an account may lose value against other currencies. Foreign currency exchanges depend on the

relative values of two different currencies and are therefore subject to the risk of fluctuations caused by

a variety of economic and political factors in each of the two relevant countries, as well as global

pressures. These risks include national debt levels, trade deficits and balance of payments, domestic and

foreign interest rates and inflation, global, regional or national political and economic events, monetary

policies of governments and possible government intervention in the currency markets, or other