Hiring Up, Wages Flat, Inflation Low…The ECB Is Gonna Do Something!
Forgive me if you’ve heard this before: “There’s a lot of good news in the latest [jobs report], but also disappointment, particularly about the seeming lack of upward pressure on wages.” For example, “employers added 252,000 net positions in December, and revised the two earlier months up by an additional 50,000. For good measure, the unemployment rate fell a couple of ticks, to 5.6 percent from 5.8 percent…The big disappointment was on wages. In the November earnings, one of the brightest signs was an 0.4 percent rise in average hourly earnings…It turned out to be a false signal. In Friday’s revisions, November wages rose only 0.2 percent. And even worse, in December they fell 0.2 percent.” Here are some charts and some people who are “left wanting”. “A critical question for the Fed in the months ahead will be how low the jobless rate can go before generating wage pressure and broader inflation.” Meanwhile, Janus Capital dissects the low nominal interest rate environment into two parts (real interest rate and inflation expectation) and says we are in a disinflationary boom, “the ideal type of economic growth.” “What we are seeing today is a market developing through productivity. This scenario is optimal because companies can generate cash flows and earnings without having to worry about the uncertainties of inflation and needing to hedge that inflation with higher prices. Such an environment leads to broad-based growth, rather than growth in only those industries that have pricing power.” Furthermore, “disinflationary boom periods like the one we are in now have historically been good for risk assets.” Meanwhile, the “relative dearth of high quality short term assets” in Europe has pushed two-year yields of Germany, Finland, the Netherlands, Belgium, Austria and France below the “zero lower bound”. “The stock of negative yielding euro debt (~€1.2tn) is now nearly equivalent to the entire size of the euro investment grade credit market. Or more than four times the size of the high yield market.” Meanwhile, Mario Draghi has a message for Greece: the ECB has “presented policy makers with models for buying as much as 500 billion euros ($591 billion) of investment-grade assets…Greek bonds are currently rated junk at all three major rating companies…’The idea of focusing on investment-grade assets is clever as it avoids the Greek issue.’”
“Chinese factory gate prices recorded their biggest annual fall in more than two years in December…Consumer prices, conversely, rose 1.5 per cent year on year…Chinese regulators have adjusted down corresponding domestic prices for diesel fuel, gasoline and kerosene by only 20 to 30 per cent [since June]. Chinese [consumer] inflation figures are much more sensitive to food prices, which rose 2.9 per cent in December.”