Jobs market gives the Fed the green light to keep hiking. In what is always the most important economic indicator for interest rates, nonfarm payroll data showed that America’s job creation engine generated 390k jobs last month (vs 436k in April), well above the consensus of 318k. The unemployment rate remained  at 3.6%. Hiring was strong in both goods-producing (59k) and private services-providing industries (274k). But details pointed to a slowing of hiring in some sectors, as retail shed workers (-61k). Average hourly earnings (aka wages) increased by 5.2% year over year, down from 5.5% prior, showing that average pay remains below Consumer Price Index (CPI) inflation, which is north of 8%. The data implies that wage growth now looks to have peaked.

Our take: May saw the smallest increase in employment since April 2021, indicating that some steam is coming out of the red-hot jobs market. Regardless, the still-strong jobs picture will keep the Fed on track to hike interest rates by 0.50% at its next two policy meetings on June 15^th and July 27^th.  How so? Despite CEO talk of hiring freezes, there are nearly two job openings for every unemployed person, indicating that mass job losses are unlikely anytime soon. Even still, we suspect that the job outlook will darken over the coming months, but likely not enough to prompt the Fed to completely pause its rate hiking plans. Rather, the darkening jobs picture will prompt the Fed to consider when to switch to a 0.25% hiking tempo later this year. When they do, inflation will still dominate the discussion, as prices for goods and services will remain uncomfortably high all summer.

Double-digit rent increases add to inflation pressures. According to Yardi Matrix, rents asked of new tenants continued to rise at double-digit rates in March. Since rents  account for about a third of the overall CPI, one of the Fed’s favorite inflation gauges, the rapid rises create a significant headwind to the Fed’s forecasted slowdown in overall inflation for the rest of the year. According to Yardi, the average rent charged to new renters in multifamily properties grew 14.8% in the year ending March 2022, down from 15.3% in February. In March, the average rent charged to new tenants in single-family homes grew by 14.1%, down from 15.0% in February.

According to a model that maps one of Yardi’s rent indexes to the relevant CPI components, the CPI component for renters will rise 7.4% in September compared to a year ago, up from 4.4% in March, while the CPI component for owner-occupiers will rise 6.7%, up from 4.5 % in March. All else being equal, increases of this magnitude would raise CPI inflation by 0.7% between now and September. However, keep in mind that these higher rents show up in the monthly CPI gauges – what the Fed focuses on – with a significant lag, hence will likely cause CPI to accelerate further over the next six months, even while private indexes such as Yardi’s show. All told, the rent-related components of CPI will be resilient to Fed rate hikes for the rest of the year; if CPI inflation slows later this year, it will be related to the index’s other components, like automobiles, gasoline, and the like.

Is your Bridge lender funded by CLO’s? If so, expect wider credit spreads. The $1 trillion Collateralized Loan Obligation (CLO) market ploughed ahead in May despite an increase in funding costs as demand for the securities softened. CLO issuance this year – a funding tool used by some bridge lenders – has remained surprisingly resilient this year while other corners of leveraged credit saw volumes fall off.  Demand for CLO’s by investors is starting to cool as economic growth concerns slowly seep into every segment of the economy. This is raising costs of  bridge lenders that use CLOs to fund themselves, and of course they often pass these higher costs onto borrowers in the form of higher credit spreads. The dynamic will worsen as economic growth concerns become front and center in the eyes of investors.