Payrolls and Patience

Getting Better?

This week, we discuss downward revisions to GDP, persistent inflation and a renewed decline in the savings rate. Real GDP growth in the first quarter of 2026 was revised down from 2.1% to 1.6%, well below the consensus estimate of 2.2%. Meanwhile, inflation remained uncomfortably high. The PCE price index rose 3.8% from a year earlier, while core PCE increased 3.3%, both still far above the Federal Reserve’s 2% target. The same report offered little comfort on the consumer. Real disposable personal income fell 0.5%, consumption rose just 0.1%, and the savings rate dropped to its lowest level since the eve of the Global Financial Crisis.

Higher Inflation, Higher Yields, Higher Stakes

This week, we discuss a series of perplexing market moves as inflation readings, oil prices, and Treasury yields all moved higher at once. Both headline CPI and PPI surprised to the upside, placing the Federal Reserve and its new Chair, Kevin Warsh, in an increasingly difficult position. According to the latest inflation nowcast from the Federal Reserve Bank of Cleveland, inflation is expected to come in at more than double the Fed’s two percent target. Meanwhile, yields on ten and thirty year Treasuries climbed sharply as investors demanded greater compensation for rising inflation risks and mounting concerns over America’s fiscal trajectory. The yield on the thirty year Treasury bond has now reached its highest level in nineteen years. Oil prices have also continued their ascent. Equity investors, however, appear largely unconcerned, choosing instead to focus on strong earnings reports from the hyperscalers. The divergence between buoyant equity markets and increasingly anxious bond markets suggests that investors are drawing very different conclusions about the economic outlook.

Payrolls and Patience

This week, we discuss the Employment Report, the Job Openings and Labor Turnover Survey, and the Berkshire Hathaway Annual Meeting. Although the headline employment figures appeared strong, the underlying composition was less reassuring. Nearly all of the payroll growth came from lower wage sectors and industries where workers are more likely to hold multiple jobs. In that sense, the rise in payrolls may be less a sign of strength than of strain, as more consumers take on additional work to make ends meet. That interpretation was reinforced by a 449,000 increase in the number of people working part time for economic reasons. The JOLTS survey told a similarly subdued story, with low quits suggesting continued uncertainty and caution among workers. Finally, Greg Abel’s message from the Berkshire Hathaway meeting echoed our own: be patient. Warren Buffett noted that there had been only five truly “juicy” periods in his career. Until such opportunities return, Berkshire will continue selling equities and holding cash in Treasuries. Without those rare windows, Buffett’s extraordinary record of outperforming the market by roughly two times over six decades would likely not have been possible.

The Narrow Road Ahead

This week, we discuss the preliminary release of first quarter 2026 GDP, the PCE inflation report, the FOMC meeting and recent earnings releases, among other developments. Although headline GDP grew by 2%, the details were far less reassuring. Growth was concentrated in healthcare, technology and government spending. Without those three pillars, GDP would have been negative. The FOMC meeting was historic: the statement drew the most dissents since 1992. Three dissenters objected to language that pointed to “additional” easing, arguing that rising inflationary pressures made such guidance imprudent. Finally, after a reasonably strong week of earnings reports, we discuss the narrow breadth of the equity market and the degree to which AI related companies remain the primary engine of the rally.

Behind Blue Skies

This week, we discuss recent macroeconomic releases, including retail sales, pending home sales and the flash composite PMI, as well as Kevin Warsh’s Senate confirmation hearings and the war in Iran. At first glance, some of the data appeared to point to stronger growth. Under the hood, however, the figures continued to tilt toward stagflation. For instance, headline retail sales rose 1.7 percent, but the figure is not adjusted for inflation and is likely to look far less robust in real terms. Although we had expected Kevin Warsh to favor lower interest rates and look through recent inflation pressures, our view is that the FOMC is likely to resist that approach and keep rates unchanged, particularly after its policy mistakes in 2021, when the committee wrongly dismissed a surge in inflation as transitory. Finally, we discuss equity market froth and the war in Iran.