Just a quick note on ECI.
The employment cost index came in a bit hotter than expected on Wednesday, printing 0.8% QoQ versus consensus of 0.7%. On a YoY basis, the headline remained at 2.8%, a cycle high.
But notably, private-sector wages and salaries jumped 3.1% in Q3, YoY – that’s the quickest pace since 2008.
This is just further evidence that the tight labor market is gradually leading to wage inflation, the so-called “missing ingredient” for the Fed.
Today’s data comes ahead of Friday’s payrolls report and as noted on Sunday evening, strength in the ECI print will likely serve to make the already critical, higher-frequency AHE numbers even more important – at least in the market’s mind.
Just to run through some of the estimates for that again, Barclays sees AHE rising 0.3% MoM and “a strong 3.2% YoY driven in part by base effects.” BofAML flags the same base effect tailwind in predicting a YoY rate of 3.0%, but the bank sees MoM printing just 0.1%. Goldman concurs with BofAML.
As a reminder, we’re still “30° of separation” from the typical 90° wage growth acceleration that occurs in late-stage recoveries when the Phillips curve snaps back to life.
Deutsche Bank will be able to update that chart once we get the unemployment rate from the October jobs report on Friday, and while the headline ECI print didn’t move (as noted above, it remained at 2.8% in Q3), the uptick in private-sector wages appears to be further evidence to support the contention that the traditional relationship between labor market tightness and laborer leverage isn’t completely broken or hasn’t been otherwise antiquated by structural deflationary forces.
The point here is that eventually, we’re likely to get a “rogue” wage inflation print of some kind or another that restores the natural order of things in late-stage expansions as illustrated in the above visual by the green, yellow, and blue highlighted near vertical lines.
That is a risk factor to the extent you believe a hawkish Fed is the problem for markets.