It’s inflation week in the US, which means finance-focused social media will ready their best (or, more aptly, worst) “transitory” jokes in anticipation of another elevated read on consumer prices across the world’s largest economy.
During the Q&A portion of last week’s post-FOMC press conference, Jerome Powell promised the Fed wouldn’t permit high inflation to “become a permanent feature” of American life.
At the same time, he conceded that inflation is likely to remain high well into next year. “We accept accountability for inflation in the medium term,” he said. “The level of inflation that we have right now is not at all consistent with price stability.”
The fresh look at PPI and, a day later, CPI, come on the heels of a strong October jobs report which many observers characterized as a “Goldilocks” read on the US labor market. That rosy characterization assumes you don’t fret about still low participation and a lack of progress on the African American jobless rate, which is nearly four points higher than the rate for white Americans.
Additionally, the October report still suggested employers are having a difficult time filling open positions. On that front, September JOLTS, due Friday, will doubtlessly show the gap between vacancies and hires remained near all-time highs headed into last month.
Labor scarcity is forcing businesses to offer more generous compensation. Wages and salaries rose at the briskest pace on record during the third quarter. Average hourly earnings in leisure and hospitality are up markedly as openings remain unfilled (figure below).
Employment in the sector remains depressed, down 8% from pre-pandemic levels.
Still, policymakers have generally stuck to the script when it comes to downplaying the chances of a wage-price spiral. “The ECI reading is just one reading. I would say that at this point, we don’t see troubling increases in wages,” Powell said last week, while reiterating that despite the persistence of price pressures, the Fed can stay “patient” on rates.
Critics suggest that’s irresponsible — an example of policymakers tempting fate, as it were. But do note that some of the very same critics have been keen to point out that rate hikes can’t alleviate supply chain frictions. In other words, the criticism is double-barreled, but it’s inconsistent. Central banks are risking an inflationary spiral if they don’t hike rates, critics say, but central banks are powerless to bring down cost-push inflation.
Fortunately, critics aren’t known for caring about consistency — harboring and espousing inherently inconsistent arguments is part and parcel of being a career critic. It’s the same dynamic that found expression in a decade of bearish stock prognostications from a collection of observers who habitually insisted that central banks had commandeered markets in an effort to push risk assets into the stratosphere. If the latter is true, why would you be bearish?
In any case, the outlook for bonds and rates is somewhat ambiguous. Traders were whipsawed by pushback from Philip Lowe, Powell, the BoE and Christine Lagarde, all of whom suggested (implicitly or explicitly) that the aggressive rate hike pricing they countenanced during October had gone too far.
“With the BoE not delivering rate hikes in the last meeting and other central banks not explicitly pushing a hard hawkish agenda, there has been some retracement of the Front end across developed markets, with the most aggressive rally in AUD short end followed by its UK counterpart and an echo in the other three,” Deutsche Bank’s Aleksandar Kocic wrote, in his latest. “At the same time, different long ends seem to be continuing their coordinated descent to lower levels as the week closed with bull flatteners.”
10-year yields in the US are now some 25bps off local highs and 30bps from 2021 peak levels. At this point, it isn’t entirely obvious what the catalyst would be for another run at 2% into year-end.
“Tapering has been announced, Powell has reiterated the Fed’s transitory characterization of inflation and NFP in October was solidly above expectations [but] despite all of [that], 10-year yields managed to drop below 1.50% for the first time since October 5 as some of the year’s final event risks came and went clearing the way for a resumption of the buying interest in Treasurys,” BMO’s Ian Lyngen and Ben Jeffery remarked, noting that CPI, supply and a bevy of Fed speakers this week “will combine to determine the degree to which investors are willing to press the bid.”
For their part, Lyngen and Jeffery aren’t looking to fade the trend. “We expect a 2-handle will once again become a reality in the year ahead, but not until more demonstrable data is in hand with an FOMC unwilling to prematurely cut off the expansion,” they added.
Powell not being reappointed could change everything.
Personally, I think they are all going to dance to the same song, regardless of who sits in the chair…..??, it would give the economorons something to write about though
I have a distinct feeling Powell whom I always thought of as a realist feels painted into a corner.. This will become a watch what he does (personally) not a what he says in his work function.. Tough job especially now..