The stock market is experiencing its worst one-day sell-off in months.
There’s no shortage of things to be worried about. Argentina just defaulted, Iraq’s a mess, and Russia could soon retaliate for the latest round of economic sanctions.
But traders agree that today’s sell-off is probably due to one stat: the 0.7% jump in the employment cost index (ECI) in the second quarter.
This number, which crossed at 8:30 a.m. ET, was a bit higher than the 0.5% expected by economists. And it represents a year-over-year growth rate of over 2%.
It’s a big deal, because it’s both a sign of inflation and labour-market tightness, two forces that put pressure on the Federal Reserve to tighten monetary policy sooner than later.
“I just confirmed this theory with Art Cashin,” said NYSE floor governor Rich Barry. “He agrees that today’s sell-off has much more to do with Fed concerns than with Argentina.” (Cashin is a veteran trader and UBS Financial Services’ director of floor operations.)
On Wednesday the Fed’s Federal Open Market Committee (FOMC) said, “a range of labour market indicators suggests that there remains significant underutilization of labour resources.”
Today’s ECI suggests otherwise.
“This is the biggest increase since 2008,” said Bank of Tokyo-Mitsubishi’s Chris Rupkey of the ECI. “Some at the Fed feel that one sign of labour market slack is low wages. Well, wages, the employment cost index, are rising again.”
“While overreacting to any single data print is usually a bad idea, we note that this series tends to be fairly stable and today’s gain is probably more than just noise,” said Societe Generale’s Aneta Markowska. “Our past analysis suggests that the Phillips curve is slowly coming back to life and wage pressures should have begun to pick up during the spring months.”
The Phillips curve posits that there exists an inverse relationship between the unemployment rate and the inflation rate.
“By the Fed’s own admission, the unemployment rate is no longer elevated and inflation is no longer at risk of persistently undershooting 2%,” added Markowska. “So why do we need another year of zero rates?”
The prospect that the Fed could tighten monetary policy sooner than expected is frequently blamed for causing market volatility. The idea is that if the Fed tightens, then it pulls liquidity out of the credit markets, which indirectly would pull liquidity out of the stock markets.
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