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Wage Growth, Inflation Pressure and Jobs May Form Unholy Trinity for Market

Wage Growth, Inflation Pressure and Jobs May Form Unholy Trinity for Market

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Thursday, 02 March 2017 09:04 AM Current | Bio | Archive

After President’s Trump’s speech to Congress, markets have now turned their attention to the Federal Reserve meeting of March 14-15, which will come with a summary of economic projections and a press conference by Fed Chair Yellen.

Fed members have been dropping hints that now might be the time to raise interest rates once again.

When one of the most dovish Fed members and FOMC voter Fed Governor Lael Brainard stated: “We are closing in on full employment, inflation is moving gradually toward our target, foreign growth is on more solid footing, and risks to the outlook are as close to balanced as they have been in some time. Assuming continued progress, it will likely be appropriate soon to remove additional accommodation.”

As a result, it’s not surprising that markets got somewhat overexcited.

In the context of all this, Yellen will be speaking on Friday, an event so momentous in the minds of some in the markets that there seems to be a state of nervous paralysis in anticipation of Yellen’s remarks.

One important thing that has changed in the U.S. economy over the past year is the extension of wage growth of lower skilled employees, a topic close to Yellen's heart.

The Fed’s Beige Book of anecdotal evidence from around the regions was not indicating much of a change in the outlook while moderate growth was not a surprising result. However, the ongoing tightness of the labor market and associated with somewhat moderate wage increases was reiterated, which raises 2 issues:

First, domestic labor costs drive the inflation outlook and with the personal consumer expenditure deflator getting closer and closer to the Fed’s target as the trimmed-mean PCE inflation rate now looks to reach the Fed's 2.0 percent objective by May, while BEA's core deflator not until October. Yes, the inflation story is something the Fed will pay attention to.

Second, Trump has promised to create millions of jobs with his program stating in his speech to Congress: “I am going to bring back millions of jobs” adding: “Crumbling infrastructure will be replaced with new roads, bridges, tunnels, airports and railways gleaming across our very, very beautiful land.”

Now, and this is important for investors to take notice of, the evidence of the Beige Book is that there will probably not be enough job seekers available to fill those millions of jobs. This could fuel undesirable inflation pressures.

Adding to this backdrop are politics in France and in the US.

In France, French presidential candidate Fillon has been put under formal investigation by the judiciary and has seen some key supporters withdraw because Fillon has not withdrawn from the presidential race.

As ever, with political risk, domestic investors seem to react to it very calmly, but international investors are more focused on what this might mean for the presidential race in the end and for the prospects of Marine Le Pen of the far-right National Front party in the second round.

Meanwhile in the United States, there have been calls for the Attorney General Jeff Sessions to resign after emerged that he did in fact meet Russian representatives during the campaign period.

This has less direct market relevance than the French news does perhaps, but the revival of partisan politics may undermine efforts to present the United States as experiencing a kinder, gentler political process.

The euro area consumer price inflation came in at 2 percent. which is above the ECB’s target of below, but close to 2 percent.

It’s a fact that inflation pressures have tended to the upside in the Euro area over the past couple of months, and if quantitative policy had not been pre-announced in December for 2017, the ECB would be under greater pressure to tighten. We’ll have to wait and see if the ECB will react to these latest inflation numbers.

The industrial producer prices for the euro area were up by 0.7 percent, which represents a rise of 3.5 percent on a yearly basis.

The euro area seasonally-adjusted unemployment rate came in unchanged at 9.6 percent in January 2017, but as the aggregation disguises so much divergence in the national levels this is rarely a concern for investors.

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments.

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Money Blog – Hans Parisis – Thursday – March 2 -2017.
trump, economy, investors, fed
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2017-04-02
Thursday, 02 March 2017 09:04 AM
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