America's big stagflation scare is over

• Friday's jobs report has stamped out worry of a stagflationary economy.
• Fears of this scenario have flared over the past weak, set off by a weak first-quarter GDP print.

The US economy looks to have steered clear of danger after the specter of stagflation spooked markets and put analysts on edge in recent weeks.

The key development was the April jobs report on Friday, which showed 175,000 positions were added last month, coming in well below the consensus forecast of 238,000. Further, average hourly earnings unexpectedly declined to 0.2%.

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.