Global Macro & Strategy

Chart of the Week: Update of most important chart in global macro

*CHART UPDATED 13/10/2021

Back at the start of July, we posed the question, “Is this the most important chart in macro right now?”  (CLICK HERE to revisit)

OK, sure, there are certainly other charts that one could argue are “the MOST important”, but I’d argue this one is right up there in the mix. In it, we are tracking wages growth in the US (the orange line), with a forward indicator which is based on the level of US labour market tightness (the blue line) which acts on a lag to US wages growth.

Here is what the chart looked like back then. Notice where the orange line and the question mark are, and the up arrow based on this relationship holding.

Here it is now, just a few months later.

And right on cue, we can see wage growth has indeed bounced off the lows and followed the path of the forward indicator (blue line) up firmly. In fact, it is now at the highest level in 13 years. If this correlation continues to hold, in the short term the blue line is suggesting it might be more muted for the rest of the year (although its kind of hard to envision that given the state of US labour markets right now with the continued supply chain issues), before significant upward pressure on wages takes hold again in 2022.

Why does this matter

The previous article (CLICK HERE) articulates why this matters so we wont rehash it all again here. In a nutshell, labour markets tend to be the greatest influence on inflation. If wage growth continues to follow the path of this indicator of labour market tightness higher as it has done in the past – and then flows into further higher inflation – then the Fed is going to be in a very sticky position where it may be forced to tighten policy,  just as our other forward models are suggesting a slowdown in the business cycle (i.e. NOT A GOOD COMBINATION). The flow on effect to asset market prices would likely be significant. 2022 is shaping up as one where significant hurdles will need to be overcome for it to look anything like 2021.

 

Author: Graham Parkes
Macro analyst & editor of The SMSF Investor

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