Inflation Dominates Fed's Focus Despite Weak Payrolls

The Federal Reserve's primary focus remains on controlling inflation, and recent weak nonfarm payrolls data is unlikely to change its policy path. According to Goldman Sachs' head of Treasuries and inflation trading, Mike Mitchell, the core CPI print was in line with expectations at a 0.2% month-over-month increase. With weaker PPI data, the outlook for core PCE, the Fed's preferred inflation gauge, looks increasingly benign.

The US labor market needs only minimal job growth to keep the unemployment rate stable due to demographic shifts and changes in immigration policy. Mitchell noted that weak payroll data is not a critical variable, as long as the unemployment rate does not swing violently. The Fed views moderate cooling in the labor market as a 'tolerable adjustment' rather than a recession signal requiring immediate intervention.

The US Treasury market faces persistent structural pressures from ongoing fiscal deficits and an AI infrastructure financing boom. Goldman estimates that AI-related corporate bond supply will reach $250 billion this year and could surge to $400 billion next year, pushing up term premiums on long-end Treasuries.