Wages softened last month according to the Atlanta Fed. The core CPI (ex-food, energy & shelter) showed only a modest rise in December too, following three benign months. Last week’s profit warning from Pearson underlines the wide reach of tech disruption, which will continue to feed into the inflation data even as the economy strengthens. More students are renting textbooks from Amazon, crushing Pearson’s margins.
Nevertheless, Ms Yellen is worried: the Fed is in danger of ‘falling behind the curve’. The four-week average for initial claims has tumbled to a new multi-decade low. The FOMC’s projections for rate hikes appear too shallow.
Faster rate hikes may not unhinge equities: the reverse earnings gap (Treasury yield minus earnings yield on the S&P 500) is abnormally low. If inflation remains under control, the current economic upswing could become the longest in the post-war era.
The dollar, however, is not a one-way bet. The cyclical recoveries in Japan and the Eurozone are taking hold. In both cases, current account surpluses have continued to rise. Exports across SE Asia have turned higher. Around the globe, growth is gathering momentum.
Summary
- Claims data suggest Fed behind the curve
- But more evidence of tech disruption points to low inflation
- Dollar capped by stronger global data
