In the space of just two working days, financial markets have done an abrupt U-turn.
Stocks are getting slammed, mirroring similar moves in risk assets. Volatility is now back to levels not seen in many years.
To many, last Friday’s US non-farm payrolls report was the catalyst, specifically the acceleration in average hourly earnings.
That saw concerns over a sharper acceleration in US inflationary pressures ratchet higher, driving US bond yields to fresh multi-year highs.
However, Tom Porcelli, Chief US Economist at RBC Capital Markets, is sceptical that the moves have been sparked by the payrolls report.
If it truly was sparked by the acceleration in US wage pressures, he thinks the moves over the past few sessions are looking more than a little overdone.
Here’s a snippet his research note explaining why:
So apparently, following Friday’s payroll report, everything has changed. Seemingly, the thinking now is that things are heating up and the Fed is going to go harder and faster than the market appreciated. For the record, we have been touting a firming in wages for quite some time now and we have flagged firmer inflation in 2018 as well. But Friday’s payroll report doesn’t really change much in the grand scheme of things. Here is a dirty little secret of that much touted wage gain — it was not broad based. Production and non-supervisory workers who make up around 80% of the employment pie actually witnessed no acceleration in their wages on an annualised basis, and the acceleration in total wages to 2.9% was also helped along by an easier year-ago comparison.
Wages in the former category have firmed over recent years but it has not broken out of the range it has been in for quite some time. Indeed, look at the slope of this metric, the change in the change if you will. When you see a notable acceleration, the slope obviously jumps. That is not happening right now. In other words, the gains have been modest.
This chart from Porcelli shows the year-on-year change in average production worker hourly earnings overlaid against the rolling change in the year-on-year rate, revealing there’s been no sharp acceleration in wage pressures for a large chunk of US workers.
As a result, Porcelli says that while markets may be right in pricing in a more aggressive rate hiking schedule from the Fed this year, it should not be driven by fears of a breakout in wage pressures.
“Our view since the beginning of the year has been that our call for four hikes this year would become consensus both for the Fed and markets and that the conversation about the Fed would evolve into wondering if they would perhaps go even more than that [or] be more aggressive,” he says.
“This seems to have happened much quicker than we anticipated. But if the fear that has gripped the market since Friday is in part a result of the payroll report, then the fear is overdone.”
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