Ameriprise Financial : Will Inflation Hinder Consumer Spending?

As reported by the Labor Department in its August employment report on Friday, the year-over-year pace of average hourly wage growth rose to its highest level since the current economic recovery and expansion began in June, 2009. Bond yields rose in response, along with expectations for the future path of fed funds.

Stubbornly sluggish wage growth has been a persistent characteristic of the current expansion, prompting analysts to offer a variety of explanations, ranging from workers being more concerned about job security than higher wages, to retiring baby boomers being replaced by lower paid millennials, to a mismatch between available jobs and the skills necessary to fill them. Each of those observations have some basis in fact, but with job creation remaining robust, enough slack may now have been removed from the labor force to finally push wages sustainably higher. Although the evidence of sustainably rising wages is not yet conclusive, labor market conditions continue to tighten. Continuing claims for jobless insurance have fallen to a forty-five year low, while there are currently more available jobs than available workers.

Bond yields rose sharply following the jobs report. The ten-year note yield climbed seven basis points to 2.94 percent, its highest level in the past month. The two-year note rose by a similar amount to 2.70 percent, its highest in ten years. Prior to the jobs report, according to the CME Fedwatch tool, fed funds futures were pricing in a nearly unanimous expectation of another quarter point rate hike later this month, so the impact of August wage strength was barely perceptible. The impact was more pronounced, however, for expectations for the December and March Fed meetings. The December odds of a fourth rate hike this year rose to 75 percent from 68, while the March odds rose from 33 to 44 percent.

Manufacturing the Strongest in Over a Decade

The August jobs report followed the ISM PMI manufacturing report earlier in the week that was the strongest since 2004, and the non-manufacturing PMI report was subsequently reported as far stronger than expected. So, the economy has maintained its momentum in the third quarter, suggesting that the labor market may tighten further.

Unfortunately, that economic strength did not translate into higher stock prices. Instead, the S&P 500 lost ground every day last week on its way to a one percent decline. It was just the second weekly loss in the last ten. Stocks had started higher on Friday, but turned lower after the president said he was prepared to impose even more tariffs on Chinese imports beyond those already in place and being considered. Strong economic and earnings growth has so far been enough to not only support equity prices, but push them modestly. That reliance will be tested the longer the trade dispute persists.

Equity Prices May be Tested This Week

The economic calendar in the week ahead includes a number of reports that will either test or reinforce that reliance. Perhaps at the top of that list is the retail sales report for August. The consumer sector has been supported by not only strong job creation, but a savings rate that was revised sharply higher. Along with still modest debt burdens this late in the expansion, consumers have the wherewithal to continue to provide a major support to the economy.

Their willingness to do so will itself be tested, however, if inflation continues to rise. The consumer price report for August is expected to slow slightly from the 2.9 percent year-over-year rate in July. But a surprise to the upside could begin to dent consumer spending power, not to mention push bond yields even higher. The preliminary reading of September report on consumer sentiment is also on the calendar. Interestingly, this gauge of how consumers are feeling has been trending lower since March, when it reached its highest level since 2004. Also on the calendar is industrial production and the Fed's Beige Book.

Important Disclosures:
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances.

Past performance is not a guarantee of future results.

The S&P 500 Index is a basket of 500 stocks that are considered to be widely held. The S&P 500 index is weighted by market value (shares outstanding times share price), and its performance is thought to be representative of the stock market as a whole. The S&P 500 index was created in 1957 although it has been extrapolated backwards to several decades earlier for performance comparison purposes. This index provides a broad snapshot of the overall US equity market. Over 70% of all US equity value is tracked by the S&P 500. Inclusion in the index is determined by Standard & Poor's and is based upon their market size, liquidity, and sector.
The ISM manufacturing index is a national manufacturing index based on a survey of purchasing executives at roughly 300 industrial companies.

The CME FedWatch Tool analyzes the probability of FOMC rate moves for upcoming meetings. Using 30-Day Fed Fund futures pricing data, which have long been relied upon to express the market's views on the likelihood of changes in U.S. monetary policy, the tool visualizes both current and historical probabilities of various FOMC rate change outcomes for a given meeting date. The tool also shows the Fed's 'Dot Plot,' which reflects FOMC members' expectations for the Fed target rate over time.
The information and opinions in this article are compiled from third party sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Ameriprise Financial. The information is not intended to be used as the sole basis for investment decisions, nor should it be construed as advice designed to meet the particular needs of an individual investor.
Indexes are unmanaged and are not available for direct investment.

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