Tags: wages | pressure | oil | crude | price

Wage Pressure to Intensify in US as Crude Oil Price Surges

Wage Pressure to Intensify in US as Crude Oil Price Surges
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Tuesday, 08 May 2018 10:04 AM Current | Bio | Archive

According to the Trump Twitter feed, President Donald Trump will announce a decision on whether to continue to honor the Iranian nuclear deal at some time today.

Under the deal, known as the Joint Comprehensive Plan of Action (JCPOA), the United States committed to ease a series of U.S. sanctions on Iran and it has done so under a string of “waivers” that effectively suspend them.

Yesterday’s Twitter feed read: “I will be announcing my decision on the Iran Deal tomorrow from the White House at 2:00pm.”

Of course, this is not a “written in stone message,” but the fact that the Twitter feed was very specific as to the time does therefore raise the probability.

The expectation is growing that there will be some kind of repudiation, though perhaps not of full repudiation with sanctions.

So far, oil prices have remained relatively high.

In the meantime, France, Germany and Britain have been looking at ways of minimizing U.S. influence in the event that sanctions are reimposed, while the Iranian President Hassan Rouhani suggested on Monday that Iran might remain in the nuclear deal even if Trump abandons it and imposes sanctions. Rouhani also warned that Tehran would fiercely resist U.S. efforts to limit its influence in the Middle East.

Now, central banks should look through the effects of the higher oil prices of themselves. However, if the combination of higher oil prices and tighter labor markets leads to higher wage pressures, then a competent central bank could be presumed to act through an accelerated pace of monetary policy tightening.

The U.S. is most at risk of wage pressures in this regard, partly because the U.S. labor market is tighter than the labor market in Europe, and partly because the U.S. consumers’ inflation perceptions are more likely to be influenced by changes in the price of crude oil.

Americans are not very efficient in consuming oil, and it’s relatively likely taxed, which means that the oil price moves pass through the consumer more readily.

It will be interesting to see the University of Michigan Survey of consumers that will be released Friday, May 11 how the American consumers react.

China’s trade data for April showed a strong rebound in both exports and imports in the wake of the Chinese Lunar New Year holidays. This is very obviously noisy data at the best of times and especially now.

Markets should not read too much into the numbers of themselves. Markets will however look for any reaction that comes through in terms of the U.S. trade tax threats.

With a bit of an effort, one can interpret the data as a supporting the idea of stronger global growth. That is a bit of a stretch to be honest, but it does serve as a reminder that the fabled “soft patch” in economic numbers is likely to be a little more than a few distortions to headline figures.

For now, at least it’s a fact that the underlying trend of global growth remains good.

The just released German trade data for March show that exports declined by 1.8 percent year-over-year (y/y) while imports declined by 2.3 percent y/y.

The German trade surplus for March came in at practically unchanged from the previous year at 25.2 billion euros or about $30 billion, with exports falling less than imports.

Besides all that, speaking in Switzerland early today, Fed Chair Powell said that the Fed’s interest rate hikes may not pose as big a risk for global financial markets and emerging market economies as many have thought, adding that Fed interest-rate decisions have had only limited impact on capital flows into and out of emerging markets in recent years, and that there may be some investors and institutions that are unprepared for the policy tightening to come.

Powell also said that to foster global financial stability and growth as the Fed raises rates, the Fed will continue to help build resilience in the financial system and “will communicate the Fed’s policy strategy as clearly and transparently as possible to help align expectations and avoid market disruptions.”

In unambiguous language that means, at least in my opinion, that the fed-funds rate will continue to move higher, as expected, and even still higher rates cannot be excluded.  

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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The U.S. is most at risk of wage pressures in this regard, partly because the U.S. labor market is tighter than the labor market in Europe, and partly because the U.S. consumers’ inflation perceptions are more likely to be influenced by changes in the price of crude oil.
wages, pressure, oil, crude, price
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2018-04-08
Tuesday, 08 May 2018 10:04 AM
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