good morning. The scenes in Brasilia over the weekend brought back painful memories from two years ago in Washington. Trump may be retreating into the rearview mirror, but anti-democratic populism is not. Send me some good news, please: robert.armstrong@ft.com.

The news of wage growth has not been so good, everyone please calm down

Markets experienced last Friday morning Jobs report – and in particular his data on slowing wage growth – as further evidence that inflation will continue to decline rapidly, and the Fed will be able to start cutting interest rates before the end of this year. The S&P rose 2.3 percent on the day, and the two-year Treasury yield fell 19 basis points, almost a full rate hike that fell short of investors’ expectations. Futures market prices now a 95 percent chance The Fed’s interest rate will be lower than what the central bank says targeting 5.1 percent at the end of 2023.

Regular readers wouldn’t be surprised that Unhedged didn’t think the news was quite as good as all of that, both because of our inherent bad temper and because we’ve argued in the past that the final rounds of anti-inflation will be the toughest.

Economic data remains vague, opaque, and confusing. Yes, the downturn in wage growth to 4.6 percent in December, and a revision to growth rates in previous months, leaves us on a trend of steady slowdown in wage growth going back to May – even if the current rate of growth is uncomfortably high:

New jobs added have fallen off each month since August, too. But adding more than 200,000 jobs a month, with ample job openings and a high turnover rate, isn’t a downturn, even with the sudden weakness in activity surveys reporting recent weakness. Barclays’ Christian Keeler thinks markets should ditch the champagne so the data will be easier to read:

A combination of rising hiring and slowing wage growth would certainly be good news on a macro level, which could make the Fed less hawkish. But we warn about that [the average hourly earnings data] It is notoriously noisy and subject to distortions from ongoing shifts in the composition of payroll employment and back to lower-wage service-sector jobs, as strong labor demand pulls in lower-skilled workers. . . The Atlanta Fed’s wages tracker next week and the Employment Cost Index for the fourth quarter (Jan. 31) both control for compositional effects, which should shed more light.

Don Resmiller of Strategas also emphasized the compositional issues:

Average wages can be affected by mixed shifts: the economy adds more part-time jobs versus full-time jobs. But it seems that workers choose to work part-time (that is, they are not part-time mainly for economic reasons). There is still a mismatch in labor supply versus labor demand. The tight employment situation will continue to threaten future wage pressures. . . Price inflation has peaked, but wage inflation appears to be holding.

Chances are good that the recession is killing wage inflation, Rissmiller thinks.

Matt Kline, in The Overhoot, makes something else important pointThe marked slowdown in wage growth can only be deflationary if it is accompanied by a lesser contraction in the labor market. If inflation is under control, demand must be lower than supply. When someone loses their job, their contribution to demand falls as their spending tightens, but their contribution to supply falls to zero – they’re out of work! So job losses alone are not deflationary. Employees should be afraid to accept the jobs and wages they now receive, and control their budgets:

Forcing people out of work does not in itself reduce pressure on prices. Scaring people away leads to spending less compared to the value they generate. Thus, from the Fed’s point of view, the ideal scenario is for workers to lose leverage to demand larger bonuses without anyone actually being fired. But this (relatively) benign outcome will only happen if the labor market returns to normal. Unfortunately, the latest data suggests that this is still a long way off.

The number of job vacancies relative to the number of people actively looking for work is still about double what it was on the eve of the pandemic. . . More important, given the close relationship with wage growth, is the number of people leaving their jobs for better prospects elsewhere. While the number is down slightly compared to the peak at the end of 2021, there has been no real change since June.

Olivier Blanchard also focuses on openings. Back in November, that is chirp that the US will soon experience a “false dawn” of inflation as commodity prices begin to fall, but that wage growth remains consistent with inflation consistently above the Fed’s target. In an email yesterday, Blanchard wrote that despite the recent data, he hasn’t changed his mind. we wrote:

The problem is that once energy/food prices stabilize, can we keep inflation stable with an unemployment rate of 3.5 percent? I guess, based on my work with Summers on the Beveridge curve in particular [the relationship between unemployment and job vacancies] That we need a higher unemployment rate, maybe around 4.5 percent.

Recent wage numbers suggest I may be too pessimistic. I don’t think so, but we’ll see. If I’m right, the Fed has to slow the economy, or think the economy will slow, before it starts cutting rates, given the delays.

Everyone, including the unprotected, wants inflation to hit the target without stagnation. But this is not the most likely outcome.

Gold and central banks

In a bad investment landscape, gold has performed well over the past 12 months:

The strong performance since August is particularly impressive because it occurred while real interest rates were strongly positive — in the one-and-a-half percent range, as measured by the yield on the 10-year Treasury Inflation-Protected Securities. Gold usually moves inversely to real rates, which reflect the opportunity cost of owning an expensive, inert metal.

One of the main reasons for this rise, such as the Financial Times mentioned At the end of last month, the increase in demand from central banks:

Central banks are snapping up gold at the fastest pace since 1967, with analysts pinning China and Russia as big buyers in a sign that some countries are keen to diversify their reserves away from the dollar. ..

in the third quarter [of 2022] Central banks alone bought nearly 400 tons of gold, the largest three-month haul since quarterly records began in 2000.

Advertisement

Does the increase in central banks’ appetite indicate a permanent shift in the supply/demand balance? John Hartsell, CIO of Donald Smith & Co. This request is noted

. . . It’s been consistently positive around 500 tons per year since the Great Financial Crisis (against mine output of about 3,500 recently), but hit a record high of 400 tons in the third quarter alone, and it’s very likely to average between 750 and 1,000 tons each from now on given For the geopolitical background as the utility of gold as a neutral (non-US dollar) reserve asset for Russia, China and Middle Eastern countries becomes more evident in 2022.

James Steele, precious metals analyst at HSBC, takes a more cautious tone. He believes that the recent strength in the gold price has something to do with expectations of a Fed rate cut as well. While acknowledging that central bank demand is higher and likely to remain that way, he believes three points should be kept in mind:

• Central banks are not preparing to avoid the dollar. It is best to think of gold purchases as a marginal diversification, in a way that does not require a commitment to other global currencies, all of which have their own problems.

• About 50 or 60 percent of doctors’ gold production goes to jewelry in developing economies like China and India, where consumers are very price sensitive. With the gold price hovering above $1,800 or so, demand is ebbing fast.

• Central banks are also price sensitive, and will adjust their purchases of gold as prices rise.

Non-hedging is a bit skeptical about gold as an investment, for standard reasons (no return, not a yielding hedge, over-inflation) but we’ll be watching closely for now.

Good read

wait, Who is the?