America’s big stagflation scare is over

It was the perfect mix of data to thwart the stagflation narrative: Job additions weren’t weak enough to signal slowdown trouble, but also not strong enough to support higher-for-longer interest rates. And since elevated labor costs are part of the stagflation equation, the dip in average hourly earnings also signaled a period of languid growth will be avoided.

The report brought full circle a stagflation discussion that started with the latest GDP print, which showed both a substantial slowdown from previous quarters and stubbornly high underlying inflation data. It sent alarm bells ringing around stagflation, which occurs when inflation stays high despite a cooling economy.

The elevated risk also caught the eye of Wall Street. JPMorgan’s chief strategist Marko Kolanovic was among the group, noting that such a scenario could come to challenge hopes for a US soft landing.

Fear is certainly warranted given the last stagflationary regime the US experienced, back in the 1970s. The era was plagued by high consumer prices, recessions, and a weak stock market.

And worry people did. According to Bank of America, stagflation-related headlines in the media spiked to a two-year high in the week following the GDP report.

But Friday’s jobs report brought needed relief.

To top economist Mohamed El-Erian, Friday’s data was a “Goldilocks report that will please the Fed and please the markets,” he told Bloomberg TV on Friday. Stocks are flying higher as a result, and interest rate cut bets rose back up.

It would have been a different story if the report printed even weaker, however. While light, the data remained above a stagflationary threshold, diffusing earlier concerns, and avoiding a possible market sell-off.

According to estimates from Bank of America’s Michael Harnett — published before the data was available — if the US added less than 125,000 in April, and average hourly earnings ticked above 0.4% from a month ago, that would only deepen the stagflationary outlook.

In that situation, odds of a equity sell-off were high, Harnett said. Instead, the benchmark S&P 500 has shot up to 1.14% as of 12 p.m. ET on Friday.