- Markets rallied strongly this week when comments from US Fed chair Jerome Powell were perceived as dovish.
- But multiple analysts called it an overreaction, and argued the data suggests there are more rate hikes in store in 2019.
- These four charts from Deutsche Bank indicate that upward pressures on wage growth and inflation are still building in the US economy.
The US Fed’s policy outlook for 2019 has been the subject of renewed focus following the October stock selloff.
As Morgan Stanley highlighted earlier this month, bouts of market volatility raise questions about whether the Fed may ease back on its tightening cycle.
And US stocks surged ahead on Friday night when comments from Fed chair Jerome Powell were interpreted as more dovish.
But Deutsche Bank chief economist Torsten Slok says markets “misinterpreted” Powell’s message.
Although the pace of future rate increases is becoming more uncertain, the Fed still remains on track to raise rates next year.
And according to Slok, that’s because there’s still plenty of data to suggest that upward pressures on wages and inflation are still becoming more entrenched.
These four charts from Deutsche Bank help explain why:
1. Leading indicator for wage growth
The bank highlighted the ongoing shift in one of the key labour force sub-components of the monthly NFIB business survey.
The data showed more US companies reported that finding “quality labor” is the number one problem facing their business.
When tracked against wage growth on a 12-month lead, the correlation suggests US wages could trend higher from here:
2. Link between wage growth and inflation
Slok said once wage growth starts to rise, it usually has a strong connection to inflation growth.
The only time that didn’t happen was in the late-1990’s when the US had a “productivity boom” — measured as economic growth per unit hour of labour:
3. Ready to expand
Turning back to the NFIB survey, more US companies are saying that now is a good time to expand than at any time since at least 1995.
When expansion sentiment is tracked 12 months in advance against underlying inflation, it suggests core CPI could be set to rise in the months ahead:
4. Fed forecast
And lastly, Slok highlighted that the Fed’s own measure of inflation is tracking higher on a 15-month lead.
If the relationship holds, it indicates that core inflation will track towards 2.8% in 2019, leaving it in the upper-end of the Fed’s 2-3% inflation target:
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