Workers will eventually return, and companies will have to raise wages
In the middle of 2021, global markets paused near historic heights, sustained not by certainty but by a collective wager — that the Federal Reserve, confronted with rising prices and a still-healing labor market, would choose patience over action. Bond yields fell quietly to month-long lows, oil crossed thresholds unseen in years, and inflation data loomed on the horizon like a question the world had not yet decided how to answer. It was a moment of suspended tension, where confidence and anxiety occupied the same breath.
- Global equities hovered just beneath record peaks, held aloft by a single, fragile conviction: that the Fed would not yet pull back its pandemic-era support.
- U.S. Treasury yields slid to a one-month low of 1.513%, as disappointing jobs data gave investors permission to believe tightening was still far away.
- Inflation refused to stay quiet — U.S. consumer prices were expected to print near 4.7%, and China's factory prices surged 9% year-over-year, the highest in over a decade.
- Strategists warned that the labor market's tightness was a slow fuse: once sidelined workers returned and wages climbed, the Fed's patience could be tested far sooner than markets were pricing.
- Oil crossed $70 a barrel for the first time since 2018, anchored by signals that Iranian sanctions would persist and energy supplies would remain constrained.
- Currency markets stayed unusually still — the euro, yen, and yuan barely moved — as investors also dialed back expectations of any hawkish signal from the European Central Bank.
On a Wednesday in early June 2021, global stock markets held themselves just below the records they had touched the day before. The MSCI all-country index sat at 716.55, European gains steadying what Asian weakness had threatened to unsettle, while the S&P 500 remained close to its own historic high. The calm was deliberate — it was the calm of a market that had made a bet and was waiting to see if it would hold.
The bet lived most visibly in the bond market. The yield on the 10-year U.S. Treasury had slipped to 1.513%, its lowest in a month and a full quarter-point below the March peak. Investors were pricing in a Federal Reserve in no hurry to tighten — a conclusion drawn largely from a single disappointing jobs report. Hiring had slowed below expectations even as labor shortages spread, and strategists at Nomura argued that so long as the job market remained constrained, the Fed had little reason to accelerate any tapering conversation. Traders who had bet on a steeper yield curve were quietly unwinding those positions.
Yet inflation was becoming difficult to dismiss. Thursday's consumer price report was expected to show annual inflation near 4.7%, with core prices at 3.4% — well above the Fed's target. The central bank had framed these pressures as temporary, a side effect of rapid reopening rather than something structural. Most economists agreed. But some were less comfortable. A strategist at Fidelity International pointed to the labor market itself as a latent risk: workers sitting out now would eventually return, and when they did, wage pressures could push inflation higher and longer than the consensus expected.
The inflation story extended beyond American borders. China's producer prices had surged 9% year-over-year, a decade-high driven by commodity costs, though softer consumer inflation offered partial reassurance. Beijing pledged no abrupt policy shifts. The yuan, which had recently touched a three-year high amid speculation that China might welcome currency strength to dampen import costs, edged up slightly — a quiet signal that the speculation had not entirely faded.
Oil told its own story. U.S. crude had closed above $70 a barrel for the first time since 2018, and was trading at $70.48 on Wednesday. Brent hovered near its highest since early 2020. The catalyst was a statement from Secretary of State Antony Blinken that hundreds of American sanctions on Iran would remain even if a nuclear deal was reached — meaning no sudden flood of Iranian supply. Energy markets, like equity markets, were pricing in a world of managed scarcity, at least for now.
The global stock market was holding its breath on Wednesday, hovering just below the peaks it had touched the day before. The MSCI all-country world index sat at 716.55, having briefly climbed to 718.19 on Tuesday, buoyed by strength in European equities. The S&P 500 remained steady near its own record territory. Yet beneath this surface calm lay a specific bet: that the Federal Reserve, despite mounting inflation, would not soon begin unwinding the massive economic support it had deployed during the pandemic.
That conviction was showing up most clearly in the bond market. The yield on the 10-year U.S. Treasury had fallen to 1.513%, its lowest point in a month, a quarter-point drop from the 14-month peak of 1.776% reached in March. The message was unmistakable—investors were pricing in a patient central bank, one unlikely to tighten policy anytime soon.
The reasoning rested on a single piece of recent data: U.S. payrolls had disappointed. The jobs report released Friday showed hiring growth had slowed below what economists anticipated, even as signs of labor shortages multiplied across the economy. Naokazu Koshimizu, a senior rates strategist at Nomura Securities, captured the prevailing view: as long as the job market remained constrained, the Fed would have little reason to accelerate any discussion of tapering stimulus, regardless of what inflation numbers might suggest. Investors who had positioned themselves for a steeper yield curve—betting that long-term rates would rise faster than short-term ones—were now unwinding those bets. Others were buying bonds to lock in the carry, the income generated by holding them.
But inflation was becoming harder to ignore. Consumer price data expected Thursday would likely show the annual rate climbing to 4.7%, with core inflation rising to 3.4%—both well above the Fed's 2% target. The central bank had already signaled it viewed these increases as temporary, a byproduct of the economy's rapid reopening rather than a structural problem. Most economists agreed inflation would probably ease in coming months, giving the Fed room to wait before acting. Yet some strategists were growing uneasy. Yoshinori Shigemi, a macro strategist at Fidelity International, pointed to the tightness in the labor market itself as a potential time bomb. Workers were staying out of the job market for various reasons now, he noted, but they would eventually return. When they did, and when payrolls began growing again, companies would face pressure to raise wages—a dynamic that could push inflation higher for longer than expected.
The inflation story was global. China's producer price index had jumped 9.0% year-over-year, the highest reading in more than a decade, driven by surging commodity costs. Consumer price growth there, however, had come in softer than anticipated, offering some relief. China's central bank was gradually scaling back its pandemic-era stimulus, but the country's leadership had pledged to avoid any abrupt policy shifts and to keep borrowing costs manageable. The Chinese yuan, which had rallied to a three-year high the previous week amid speculation that Beijing might welcome a stronger currency to help tame import prices, ticked up slightly to 6.3943 per dollar. Naoto Saito, chief researcher at the Daiwa Institute of Research, noted that while Chinese authorities had denied such speculation, history suggested the yuan could indeed rise when import prices spiked sharply.
Elsewhere, currency markets were quiet. The euro held steady at $1.2178, and the dollar remained flat at 109.47 yen. Investors had also scaled back expectations that the European Central Bank would signal plans to reduce its asset purchases when it met Thursday to review policy.
Oil markets, by contrast, were holding firm. U.S. Secretary of State Antony Blinken had stated that even if the United States reached a nuclear agreement with Iran, hundreds of American sanctions on Tehran would remain in place—a signal that crude supplies would not suddenly surge. U.S. crude futures closed above $70 per barrel for the first time since October 2018 on Tuesday and were last trading at $70.48, up 0.6%. Brent crude rose 0.6% to $72.66, hovering near its highest level since early 2020. The market was pricing in a world where energy supplies would remain constrained, at least for now.
Notable Quotes
As the recovery in the job market is contained, any discussion at the Fed on tapering is unlikely to gain momentum, even if it starts soon.— Naokazu Koshimizu, senior rates strategist at Nomura Securities
The U.S. labour market looks really tight. At the moment, workers are not coming back for various reasons. But they will eventually return and as payrolls grow, companies will have to raise wages.— Yoshinori Shigemi, macro strategist at Fidelity International
The Hearth Conversation Another angle on the story
Why are stocks near records if inflation is rising toward 4.7%? Shouldn't that scare investors?
It would, except investors believe the Fed won't act on it yet. The weak jobs report last Friday changed the calculus—if hiring isn't strong enough, the Fed has cover to stay patient even as prices rise.
But doesn't a tight labor market eventually force wages up, which pushes inflation higher?
Exactly. That's the risk some strategists are flagging. Workers are sitting out right now for various reasons, but when they come back and companies start competing for labor, wage pressure could become real. Then inflation might not be as temporary as the Fed is betting.
So the bond market is betting the Fed stays put, but that bet could unwind quickly?
Yes. If Thursday's inflation data comes in hot, or if wage growth starts showing up in the data, investors will have to reconsider. The whole structure—low yields, high stocks—depends on the Fed staying on the sidelines.
What about China? Its producer prices are up 9% year-over-year.
China's in a different position. Its consumer inflation is softer, and the central bank is gradually pulling back stimulus anyway, but carefully. They're not trying to shock the system. The yuan's slight strength suggests Beijing might be okay with that, even if they won't admit it publicly.
And oil staying above $70—what does that tell us?
It tells us the market doesn't expect a sudden flood of Iranian crude even if a nuclear deal happens. Energy remains tight, which supports prices and adds to inflation pressures globally.