The Global Markets Weekly – 5/4/18

Posted May 6, 2018 by rvillareal

Too Quiet on the Wage Inflation Front?

Both last week’s FOMC meeting and the April jobs report calmed fears that U.S. rates need to head higher more quickly than already penciled in. Having already lifted their projections in March, Federal Reserve officials are singing from a similar songsheet, reminding investors the two percent inflation target is symmetric, not a ceiling (as has been the complaint in the past), and that some overshoot may be tolerated over the near term in favor of a medium term outlook that still sees prices at or around 2%. The current mid-year acceleration is well-anticipated, and should continue through July data. Coming months bring favorable year-ago comparisons and energy prices are sturdy—even a quick touch of 3% y/y wouldn’t be out of reach for the headline CPI, with the PCE running softer but above 2%. A CPI update is due Thursday.

Nevertheless, the average hourly earnings figure is a tenuous peg on which to hang our benign wage inflation hats. It’s far from definitive, it’s a noisy series subject to sometimes large revisions, and it can be impacted by relative shifts in industry job gains or hours. As recently as early February the Phillips curve was suddenly back in play in the view of DE, many analysts, and investors as this measure showed a 2.9% y/y result. A downward revision brought that to 2.8%, and the last three months show rises of a steady 2.6% y/y. Meanwhile, the BLS’s Employment Cost Index accelerated to a fresh post-recession high in Q1 at 2.7% y/y, while unit labor costs have been on firmer footing in recent quarters. The trend may of course still turn out to be sideways, and gradual acceleration less robust than traditional Phillips Curve frameworks suggest, but investors may prefer to stay vigilant with respect to sounding the all clear on wage and inflation pressures just yet.

The coming week is quieter, with the Bank of England decision Thursday, along with trade and political risks (including to the upside) in the U.S.. For the U.K., in addition to economic weakness, inflation is trending lower as the effects of the currency’s depreciation are wearing off. This downtrend is consistent with the BoE’s objective and would seem counterproductive for the policymakers to apply further pressure. In addition, the pound’s pullback would make British goods more competitive, helping to boost exports, another major objective underpinning the BoE’s GDP forecast for 2018. Holding the line on a rate hike would also echo recent comments by the ECB’s Draghi, who emphasized that “prudence, patience and consistency” will continue to underpin ECB policy. DE assesses the odds of a BoE rate hike as better than market pricing around 10%, but a long way below even odds.

Coming Week’s Key Indicators and Events

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