Financial Industry Insights from Advisors Asset Management


Cliff’s Notes (August 5, 2022)

It would be hard to argue that today’s release of July’s Non-Farm Payroll was anything but strong. The headline number of 528,000 jobs was 2x the consensus expectation while the unemployment rate actually ticked down from 3.6% to 3.5%, coming within a whisker of the multi-decade all-time low we saw pre-pandemic. It should come as no surprise then that the Average Hourly Earnings number came in hot again and continues to remain above 5% year over year. This is important because strong job gains means strong wage gains which means higher and stickier inflation will persist as wages, combined with shelter costs, are well over 50% of CPI (Consumer Price Index). It is unfortunate, but in this case it’s good news is bad news for the path of Fed Funds and interest rates with consequent implications for continued headwinds for asset classes with longer-duration sensitivities.

In July, The Fed made a major move by switching their reaction function from “forward guidance” (which as it turned out was folly given the unpredictability of inflation) toward “data dependency.” Well, now we and the Fed are all living “real time” and given the volatility of the data, we should expect continued volatility in expectations around the path of inflation and the economy. Data dependency, combined with the Fed’s comment that we might expect “unusually large” moves in Fed Funds, quickly worked its way through the yield curve. Yesterday, the futures markets had a roughly 33% probability of a 75bps (basis point) Fed rate increase in September. Today, that probability has doubled to 66%.

It seems clear the Fed will try and accelerate future moves to create the “demand destruction” necessary to put the inflation genie back in the bottle. In our minds, this also “pushes out the pivot” that the markets priced in for eases in early 2023.

As we have said, we would not be surprised to see the recent bounce give ground as our view is that inflation will come down but remain elevated and pernicious well into 2023.

We think the bounce gives investors the opportunity to capture some of the rebound by taking recent gains and repositioning portfolios toward more optimal outcomes in an environment still challenged by the same macro drivers we saw in the first half: persistent inflation, leading a Fed to go “further and faster,” pressuring rates and slowing the economy. The outcome of that mix is continued volatility. This is the “Regime Change” we have been speaking about.

Viewed through the lens of our perspective of a Regime Shift driven by inflation, we would continue to be cautious on long-duration assets in both equities and fixed income. We suggest seeking out sectors that are quality focused (in the face of a slowing economy), income generating (for predictability of returns) and investments that benefit from the inflationary environment such as energy, commodities and select real estate. In fixed income areas such as shorter duration investment grade and high yield make sense as well as bank loans where one “unfixes their fixed income” — shorter duration preferreds providing both income and defensiveness against rates. Given the recent bounce, we think this may prove a good time to speak with investors about their portfolios and how they might better future proof them from the environment evolving in the era of “data dependency.”

CRN: 2022-0805-10239 R

This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information at commentary-disclosures. For additional commentary or financial resources, please visit


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