Markets are having a quick re-think across the board as everything we have forecast continues to happen. The US economy is indeed slowing.
Job growth is slowing. Not at all surprising following the massive layoffs happening across the country. Wages are accelerating which is of course to be expected in such an extreme inflation environment. We announced many months ago that the US was already in an upwards wages prices spiral and that future data would confirm this.
Wages jumped again even as job growth slowed. The US economy added 208,000 jobs in June. Slowing significantly and it has been trending lower for some time now.
Unemployment is hesitating around the 3.6% 3.7% area for the moment, but we all know what the risk side is for this indicator going forward. At some point it will likely break the immediate tight range to strike out to 4.5 and higher. That is a level the US economy could cope with if it were strong in the old normal ways.
US Wages remained worrisomely elevated in June. Wages are growing steadfastly above what the Federal Reserve would be comfortable with at o.4%. Wages growth is stuck at 0.4% and with clear upside risk too.
In a nutshell, while jobs growth is slowing it is not enough to make the Fed happy by a big margin. Wages growth will only accelerate what is likely a new wave of panic at the Fed.
An internal panic that will remain behind closed doors for only so long. If we continue to see elevated and alarming core inflation, coupled with still too strong a jobs market, in the Fed’s eyes, and the entrenchment of high wages growth, the Fed can head above 7% and not just 6.
Even more hikes than the market’s current worst fears are highly probable.
Remember, the ‘market’ view on these things has been wrong all the way through this cycle. So why would you think current market pricing of future Fed moves is accurate? Hardly a reliable trading strategy.
It is when markets are wrong that we get our biggest opportunities, and this is still the case when it comes to Fed expectation pricing. Both in the bond and equity market and indeed across all markets.
The point is that this is an on-going process where three basic facts remain the primary drivers of future, not current pricing. Inflation is higher for longer. An old school Fed that doesn’t understand and will be blinkered with a sledgehammer approach. A profoundly disrupted US economy that will continue to crumble.
I wrote some time ago that the US economy had reached a tipping point where the Fed’s action, on top of a real world slowdown in any case, would generate years of pain for the economy. This is what the data will eventually tell us.
In the real world of the USA, it is what business owners and consumers across the land are already feeling and saying. The ivory tower detachment of Wall Street is at historic extreme levels.
Market commentary and analysis from Clifford Bennett, chief economist at ACY Securities
