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In today’s issue, signs of inflation lead to market jitters, Fed officials may shed light on the central bank’s next move, inflation concerns are also affecting U.S. bond yields, the labor market and corporate earnings look strong, and Congress appears close to another stop-gap spending measure.
INFLATION WORRIES SPARK STOCK SELLOFF
Policymakers, economists and workers have been waiting—and waiting and waiting—for wages to pick up. Now that it looks like they are, markets are a bit agitated.
U.S. stocks last week saw their largest weekly drop in two years after some downbeat corporate earnings reports and signs of faster wage growth in the latest U.S. monthly employment report.
If worker pay is gaining momentum, that could feed inflation, prompting central banks to tighten monetary policy faster than expected.
The selloff in world stocks deepened Monday morning amid expectations of rising inflation and a sudden climb in government bond yields.
LISTEN TO THE FED THIS WEEK
The Federal Reserve has penciled in three rate increases for 2018. Several officials have since raised the possibility of a fourth.
That’s partly because of signs that low unemployment and reports of labor shortages are finally showing up in wages, David Harrison writes. Fatter paychecks could push up inflation, which has fallen short of the central bank’s 2% target for most of the past five years.
“Wage pressures are likely to intensify as the unemployment rate keeps falling. We expect inflation measures to follow,” says High Frequency Economics’s Jim O’Sullivan.
This week is a busy one for Fed-speak. Listen closely for hints on rates and inflation. We’ll get remarks from the St. Louis Fed’s James Bullard Tuesday, Dallas’s Robert Kaplan, New York’s William Dudley, Chicago’s Charles Evans and San Francisco’s John Williams on Wednesday, and Philadelphia’s Patrick Harker, Minneapolis’s Neel Kashkari and Kansas City’s Esther George on Thursday.
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WHAT TO WATCH TODAY
Earlier today, the eurozone purchasing managers index from IHS and Markit was revised up 0.2 percentage point in January to 58.8, its highest level since June 2006. A small revision isn’t a huge deal, but it’s a reminder that the eurozone economy is looking good at the start of 2018. Economists at J.P. Morgan say the PMI is consistent with a 3.6% pace of GDP growth.
The Institute for Supply Management’s nonmanufacturing index for January is due out at 10 a.m. ET. The survey isn’t as closely watched as its manufacturing counterpart, but covers a broader swath of the economy. Economists expect a reading of 56.5 a sign of accelerating activity for the service sector.
The European Central Bank’s Mario Draghi speaks at the European Parliament in Strasbourg, France, at 11 a.m. ET.
The Reserve Bank of Australia releases a policy statement at 10:30pm E.T.
That kicks off a busy week for central banks around the world. In addition to Australia, Brazil and India (Wednesday), the Bank of England, Mexico and New Zealand (Thursday), and Russia (Friday) are among those making policy decisions.
TOP STORIES
IT’S NOT JUST STOCKS
Here’s another key market development with implications for the broader economy.
Investors on both sides of the Atlantic are dumping government debt, though for different reasons, Jon Sindreu writes. In the U.S., they see more inflation coming; in the eurozone, they see stronger economic growth.
On Friday, the 10-year Treasurys yield closed at its highest level since January 2014. Bond yields act as a gauge of future economic performance as they broadly track where central banks are expected to set interest rates. The 10-year Treasury is a key benchmark for mortgage rates, corporate borrowing and other debt.
WHO’S GETTING PAID?
One reason investors are worried about inflation: Wages for U.S. workers started the year with their strongest gain since the recession ended.
A closer look shows some of the biggest increases came in the highest- and the lowest-paid industries, Sarah Chaney and Eric Morath write. Wall Street brokers and others in the financial-services sector received the largest pay increase among major industries.
On the other end of the spectrum, hourly wages in hospitality–a field that includes restaurant workers–also recorded among the best increases, partially reflecting rising minimum wages in many states.
Still, managers drove the aggregate pay gains. Wages for all private-sector employees increased 2.9% in January from a year earlier. Nonsupervisors, about 82% of the workforce, saw a 2.4% increase, modestly above the pace of inflation.
LABOR MARKET: STRONGER FOR LONGER
Despite some economic red flags, growth is solid across much of the globe.
The most recent positive data point: U.S. employers added 200,000 jobs in January and the unemployment rate held at 4.1% for the fourth straight month. That’s the lowest level since December 2000.
February will likely be the 89th consecutive month of job creation, the longest streak of continuous hiring on record and a testament to the durability of an economic expansion that began in mid-2009.
CORPORATE PROFITS BOOMING
Companies also are doing pretty well.
Fourth-quarter corporate-earnings growth is on track to post a 15% increase for S&P 500 companies, one of the best readings this decade, Kevin Kingsbury reports.
Analysts are so far sticking to their view that this year could be almost as good, with earnings projected to rise by double digits for each quarter of 2018 for the S&P 500.
MEANWHILE, IN WASHINGTON
Remember the three-day government shutdown?
Congress is expected this week to pass another short-term spending bill to avoid a repeat, Kristina Peterson and Laura Meckler report. The government’s current funding expires at 12:01 a.m. Friday.
Immigration has become entangled in the spending negotiations. Sens. John McCain (R., Ariz.) and Chris Coons (D., Del.) are pitching a plan that offers a path to citizenship for so-called Dreamers and orders a comprehensive study to determine what border-security measures are needed in hopes of breaking the impasse and setting up a long-term deal.
A breakthrough would be a positive sign for the debt limit. The Congressional Budget Office estimates the government will run out of cash to pay its bills in the first half of March unless Congress raises the cap.
TWEET OF THE DAY
WHAT ELSE WE’RE READING
The European Central Bank has an analysis on U.S. tax reform from a European perspective. “Available estimates suggest that the impact of the tax reform on U.S. GDP will be positive in the short term, while the long-term effects are much more uncertain,” it said. It would be more positive for the U.S., the paper noted, if the reform were financed by spending cuts or raising certain other taxes. As for Europe, “the reform risks intensifying tax competition worldwide, entailing a possible erosion of tax bases in EU countries,” the paper stated.
This isn’t terribly new research but the Super Bowl just wrapped up and it is flu season. So: “We estimate having a local team in the Super Bowl caused an 18% increase in influenza deaths for the population over age 65,” Charles Stoecker, Nicholas J. Sanders and Alan Barreca wrote in the American Journal of Health Economics. “Results are most pronounced in years when the dominant influenza strain is more virulent, or when the Super Bowl occurs closer to the peak of influenza season. We find no impacts on influenza mortality in hosting cities. Our findings suggest mitigating transmission at gatherings related to large spectator events could have substantial returns for public health.”
What happens when immigrants leave? The Economists looks at Harrogate, a northern English town. Official estimates show that since 2012, more foreigners have left Harrogate than have arrived each year. The immediate result has been a tighter labor market. “Unemployment has fallen to 3.6%, below the national and regional levels, allowing some workers to drive harder bargains. Though real median wages in Harrogate have not changed much since 2014, at the lower end they have risen by 9%. … Locals worry about who will care for the elderly and wait on tables in restaurants if migrants continue to leave.”
UP NEXT
U.S. export and import figures for December come out Tuesday at 8:30 a.m. E.T. on Tuesday. The politically sensitive trade gap rose to a nearly six-year high in November. The trade deficit is expected to widen to $52.1 billion.
The St. Louis Fed’s James Bullard speaks on the economy and monetary policy in Lexington, Ky. at 8:50 a.m. E.T.
The Job Openings and Labor Turnover Survey for December is out at 10 a.m. E.T.
from Real Time Economics http://ift.tt/2nIiy9Q
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