COMING Q1 2019 WAGE GROWTH INFLATION PRESSURES
MATA: DRIVERS - INFLATION
SOURCE: 11-29-19 - MacroVoices.com - "Julian Brigden: Secular Bond Bear Doesn’t Preclude Significant Rallies"
Our work suggests that there is another leg up in inflation coming. It might be the last
one, but I think it makes the job of the Fed quite hard. On this slide I’m showing you actually
their own metrics. So in green (above), you’ve got the New York Fed’s underlying inflation gauge,
UIG. And you can see that it perfectly caught and it dipped in the middle of this year. And it
leads and now is really accelerating.
That’s actually what we fear. We still fear that there is another leg higher in inflation. And, if you
look on Slide 16 (below), continued wage pressure. So if you’re looking – even if you think some of the
data is really turning and we are beginning to roll over, I think you need to be quite careful
about when and where you position.
My preference would be if you really think, oh, I’ve got to own Treasuries because I’m
bearish on the equity market and this thing is all going to roll over, then just go and bloody sell
the equity market.
And I think we have to remember that – it’s been a long time but we have to remember – that
the Fed isn’t always your friend. It’s been a decade since ‘08 where the central banks have
consistently had your back. And they’ve always been able to ease as risk assets wobbled.
Because they were worried about deflation.
Now if we move into a world where increasingly – and we think this is the case – we’re going to
be worried about inflation structurally, the Fed cannot be your friend. And maybe we can go
back to a situation that we had in 2000 when, with the Nasdaq down 35%, we get a burst of
higher average hourly earnings, and the Fed hikes 50 basis points. Not just 25. Fifty.
Now I don’t think the Fed is going to go 50. But the point is, if you’re sitting here and you’re
saying, well, I think the Fed is done, the equity market is down 5% so they’ve got to be done,
you’re delusional. Particularly if you think that the inflation and other data is going to continue
as we do, at least into that first quarter, with wages and core inflation pushing higher.
It makes this Treasury trade, I think, a lot more complicated now. As I said, equity markets go
straight down, fine. Bonds are going to rally. But, even then, my preference would be to be
focused on the front end of the curve and not to take that risk in the long end.
Because there is something that stinks out there. And it’s not good with the deficits that we are
running and this lack of demand. It’s a big problem.