International Forecaster Weekly

WAGE GROWTH VS. MORE JOBS Does the Reward Outweigh the Risks?

The surprising pace of recent job growth may be catching recent headlines. But, as Neil Irwin points out, other details contain the biggest implications for markets in the months ahead; namely, wage growth.

Guest Writer | February 9, 2022

By Dave Allen for Discount Gold & Silver

Say what? An artist promoting a new digital coin placed a gold cube in Central Park last week. And like so many things in Washington these days, the cube is hollow inside.

No, this isn’t your grandparents’ — or parents’ — gold rush. They knew what they were doing when they bought gold and silver coins. 

This is more akin to King Midas and the excesses of gold in the days of reality TV shows.

This latest entry into our cube reality replaces last year’s tiny tungsten cubes — a hit with folks who have too much money.

The gold cube is 410 pounds and worth about $11.9 million at today’s closing gold price of $1,821 an ounce in the New York spot market. 

The inevitable NFT (Non-Fungible Token) is scheduled to be launched later this month. 

An NFT is a digital asset that represents real-world objects like art, music, in-game items and videos. 

They are bought and sold online, frequently with cryptocurrencies, and they are generally encoded with the same underlying software.

Although they’ve been around since 2014, NFTs are becoming more notorious because they’re an increasingly popular way to buy and sell digital artwork. 

A staggering $174 million has been spent on NFTs since November 2017. 

The gold cube’s artist, Niclas Castello, is also selling the Castello Coin that was last trading at 0.39 euros.

The cube went to dinner on Wall Street last week, according to Artnet. But its whereabouts, after its appearance in Central Park, are now unknown. 

Remember Maurizio Cattelan's gold toilet a few years? It was dubbed "America" debuted and premiered at the Guggenheim Museum (near Central Park) in 2016. 

Though the john cost millions to make, Cattelan (who’s also known for creating a $120,000 banana), said it was a great leveler.

“Whatever you eat, a two-hundred-dollar lunch or a two-dollar hot dog, the results are the same, toilet-wise," he said.

I guess he means it all ends up at the sewage treatment plant.

Wage Growth vs. More Jobs

The surprising pace of recent job growth may be catching recent headlines. But, as Neil Irwin points out, other details contain the biggest implications for markets in the months ahead; namely, wage growth.

As we now know, wages jumped again last month — way above expectations — and for workers looking for bigger raises that offset the effects of inflation, that’s good news. 

But the higher wages could end up adding more fire to already hot inflation numbers and provoke a more aggressive response from Federal Reserve officials already intent on tightening as soon as next month.

The government reported that average hourly earnings were up 0.7% in January and 5.7% over the last year.

Wages Still Growing. The thing is, according to Irwin, the latest report shows wage increases accelerating, not leveling off or receding, as many economists thought would be happening by about now.

Over the three months ended in January, average hourly earnings rose at a 6.9% annual rate — and that rolling average has risen in each of the last four months.

Among nonsupervisory workers, the number is 7.8% — the highest since 1981, except for a brief period early in the pandemic when a lot of figures like these were distorted.

For now, workers are still playing catch-up to high inflation — economists expect Thursday’s release of the CPI to show a 7.3% rise in prices in the 12 months ending in January.

That follows annualized increases of 7.0% in December, 6.8% in November and 6.2% in October.

But Irwin says the flip side of workers catching up “will be continuing cost pressures facing businesses in 2022, especially in labor-intensive industries.”

Reward Outweigh Risks? Moreover, if pay keeps rising at higher rates, there's a greater risk of an outright wage-price spiral — the one thing Fed policymakers hope to avoid.

The main tool that Fed chair Jerome Powell and his colleagues have to try to stop that from happening is raising rates higher and faster.

That explains both why Treasury yields rose sharply last Friday (see below) and why futures market odds that the Fed raises interest rates by 0.5% at its March meeting — instead of 0.25% — rose to 37% from 14% on Friday.

One of Powell's counterparts across the Atlantic is using a more direct approach to try to rein in wage growth there — by urging his citizens to restrain themselves in seeking higher pay.

Bank of England governor Andrew Bailey said, "I’m not saying nobody gets a pay rise…but I think what I am saying is we do need to see restraint in pay bargaining, otherwise it will get out of control."

Given the immense political pushback that Bailey received for those comments, Irwin believes that Powell & Co. may want to think twice about talking down wages.

Yes, workers need better raises — anyraises — just to keep up with higher prices. 

But the higher and faster they get them, the more likely the Fed and their global counterparts will get nervous that higher inflation has gotten entrenched…and that’s no good for anybody.

Oil Hits $93 a Barrel

Inflation certainly isn’t moderating any time soon because of energy costs.

Oil prices briefly touched $93 a barrel on Friday, as sub-freezing temperatures in Texas raised the risk of short-term supply disruptions.

Some crude producers in Texas' oil-rich Permian Basin cut production on Thursday due to freezing conditions, according to S&P Global Platts.

And those cuts may have triggered unpleasant flashbacks to last February's unprecedented Texas Freeze.

The resulting widespread power outages shook the energy industry, taught Americans about the Texas energy grid and led to a sudden and massive price surge — scaring the flannel PJs off millions of Texans.

Matt Phillips points out that climbing energy costs often act as a tax on consumption, “cutting into the cash available for Americans to spend elsewhere and potentially undercutting the economic recovery.”

But wage growth and low interest rates — which have made payments on car loans and mortgages more affordable over the last few years (despite skyrocketing used vehicle prices) — means more workers can at least afford to pay more at the pump…for now.

Nevertheless, even though higher energy prices may not burden the economy or households too much, they will further annoy Americans, already driven to the edge by two years of pandemic living — especially in an all-important election year.

Treasuries React by Going Higher

The latest jobs report drove a steep rise in Treasuries too, as more investors came around to thinking that the Fed might be able to actually pull off an interest rate rise.

Yields on the 10-year Treasury note climbed above 1.9%, the highest since December 2019 — when gold was just a little over $1,500 and starting its rapid rise to its all-time highs over $2,000 just six months later.

Yields on Treasury bonds are the direct and indirect basis for interest rates on everything from corporate bonds to car loans and mortgages.

They essentially determine the cost of borrowing across the economy — and those costs are clearly going up, some faster than others.

Since last November, the Fed has been signaling that it would eventually raise its Fed Funds rate (at virtually 0% for a few years) and begin a new, long-term hiking cycle as it tries to clamp down on inflation while avoiding another recession.

Last week’s rise in longer-term Treasury yields suggests that investors, who have been rightly skeptical that the Fed would be able to embark on a multi-year rate hiking cycle, may be starting to change their minds.

We’ll know soon enough whether their thinking will be rewarded or betrayed by the decision makers.