Chart of the week: Wall Street confronts the challenges of the Fed and rising wages

Source: Federal Reserve St Louis.

American workers are increasingly benefitting from a tighter labour market. Strong demand for labour has given US workers more bargaining power. October’s payroll report shows that annual wages growth is running at 3.1% (blue line). This is the largest gain in US wages in nearly ten years. So for the US corporate sector, this rising wage tide is a threat to profit margins and thereby to Wall Street.

The US Federal Reserve (Fed) has raised their key interest rate eight times since 2015 with the current setting of 2% to 2.25% (red line). The Fed has also given forward guidance that further interest rate rises should be “gradual”. This is essentially the Fed ‘telegraphing its punches’ to financial markets. However given the recent strong US jobs growth, a very low unemployment rate and wages growth accelerating, the Fed may need to punch harder on interest rates to counter US inflation pressures.

So Wall Street confronts two potential opponents that could deliver a knockout blow to investment returns. A more assertive Fed that needs to contain inflation by raising interest rates at a faster pace than the market expects. The other opponent in the ring is the US employee who recognises that there is scope to push for higher wages. Either opponent or both combined have the potential to leave Wall Street on the canvas.

 Source : Nab assetmanagement November 2018

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