Wage inflation before rate rises

On Wednesday we saw the much awaited unemployment rate. Many papers have focused on the employment data as the level falls closer to the 7% level Mark Carney identified in his forward guidance. Despite the obvious speculation that rates could rise in the next few months after todays report, I stick firmly to the view that the more likely scenario is for the forward guidance to be lowered, than for rates to rise if the target of 7% is reached. My view is predicated on the assumption that whilst wage growth remains close to zero, inflation, despite the best efforts of central banks is not a threat, and will remain within government targets.

Mark Carney and the UK government received another boost today outside of the employment data as the UK received the biggest upgrade to growth forecasts for 2014 of any major economy. The economy they believe is being buoyed by easier credit conditions and renewed confidence. The IMF now expects the UK economy to grow by 2.4% in 2014. The global economy is now expected to grow at 3.7% this year against an expectation last October of 3.6%.

If one wants to see how QE has impacted financial markets, one only has to look at the exchange rate between the Canadian and US dollar and compare that to the performance of the S&P 500. The CADUSD exchange rate has been used as a sign of risk appetite, as one can see below, the two ran in tandem until September 2012. That was the timing when Ben Bernanke and the FED decided to start their bond-buying program. The question will be as the stimulus is slowly withdrawn will the USD rally or will the market retreat.

Source: Yahoo Finance

Markets seem in limbo at the present time, The FTSE 100 having broken its recent trading range is struggling to push on, the S&P 500 has been trying and failing over the past few days to break through the 1850 level and the Stoxx 50 has been hovering around 3150. As readers of the blog will know I keep an eye on the Vix, otherwise known as the fear and greed index. The Vix has been creeping higher over the past few days, having said that it still trades close to historic lows. Equity markets may well stay in limbo whilst we wade through the results season, which to my mind so far has been like the curate’s egg, good in parts. At least if the 1st quarter earnings reports are a little mixed it will bring expectations down for the rest of the year making them easier to achieve. A disappointing earnings season will in the short term give the bears more ammunition that markets have run too far.

Posted on January 23, 2014 .