Average hourly earnings are beginning to reflect the strong gains recorded by the Atlanta Fed’s median wage tracker. The FOMC appears to have fallen behind the curve. Faster wage inflation points to higher Treasury yields in 2017. Unless the FOMC responds, it also suggests a steeper yield curve.
However, higher wages need not translate directly into a pick-up in core inflation. The quickest rates of payroll growth continue to be reported in tech-related services. Many of these companies are disruptors, providing opportunities for big cost savings.
The trajectory for Treasuries will also depend on global growth. The data from the UK, Eurozone, China and Singapore were all positive last week. Stronger economic activity outside of the US will reduce the impact of a Fed tightening on the dollar and support the rally in the S&P 500.
Summary
- Higher wages need not translate directly into a pick-up in core inflation
- Disruptors provide opportunities for big cost savings
- Stronger global growth may temper rise in dollar and provide support for US equities
