- Financial market volatility has been elevated since January’s US non-farm payrolls report was released
- Faster wage growth was a factor many cited to explain bonds and stocks were sold off
- One indicator is pointing to a strong acceleration in wage pressures in the months ahead
Volatility is back with a vengeance across financial markets, especially in stocks.
While any number of factors have contributed to the wild daily swings, including the threat of a potential trade war, the lift in volatility started on the day January’s non-farm payrolls report was released.
A large jump in average hourly earnings, in particular, certainly caught the the eye, rising to the highest level since the global financial crisis.
Given the strong influence wage growth has on inflationary pressures, and the influence inflationary pressures has on monetary policy settings, many saw the usually large increase as a potential catalyst for more interest rate increases in the period ahead.
Bond yields rose and stocks sold off, kicking off a period of volatility not seen for several years.
If underlying concerns about inflation are already elevated, they could be about to get a whole lot higher.
At least based off the chart below.
It shows the relationship between US businesses indicating that they plan to lift worker pay, according to the monthly NFIB Small Business Survey, against annual changes in private sector employee compensation.
The former has been advanced by nine months.
At 0.9, the correlation between the two is not perfect but very, very close, suggesting US wage pressures may not only grow this year but accelerate quite sharply.
However, as has been seen frequently in recent years, relationships between wage and other labour market indicators such as unemployment are nowhere near as strong as they were in the past, meaning the increase in the NFIB survey needs to be treated with some caution.
Indeed, the gap between the two indicators is looking fairly wide compared to what was seen in the pre-GFC era.
Still, if wages grow at even half the pace the survey indicates, it suggests recent trends in inflation and financial markets could become even more entrenched.
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