The world’s markets are rallying nicely as the U.S. enjoys improving data from Main Street, but inflation remains the ultimate goal. The world’s central banks are trying everything, even negative interest rates, to battle disinflation, but while the investment markets don’t seem to think anything is working, economic data suggests that we’re on the cusp of inflation beginning, at least in the U.S.
Markets post a nice rally
The debate continues about whether the Federal Reserve can and will trigger inflation (indeed, past history suggests that central banks have little to do with what happens in their economies despite their best efforts). This week’s rally across the board suggests that perhaps investors are beginning to believe that the world’s economies are finally finding some stability, probably because of this week’s positive U.S. economic data.
U.S. stocks soared to a two-month high this week, with the S&P 500 passing 2,000 again as it looks on track to end the week above this key support level. Emerging market equities are back from the dead on the back of a multi-day rally, and Asia saw another rally this week as well.
Peter Lynch was one of the best growth investors of all time. As the Magellan Fund manager at Fidelity Investments between 1977 and 1990, he averaged a 29.2% annual return. Q1 2021 hedge fund letters, conferences and more The fund manager's investment strategy was straightforward. He wanted to find growth companies and sit on them Read More
Wage pressures point to inflation coming
But will this rally continue, or is it going to be short-lived? Gluskin Sheff Chief Economist David Rosenberg is bucking the bearish trend on Wall Street and running with the bulls instead, touting positive jobs and wages data as a sign that inflation—the current gold standard for economic recovery—may be right around the corner.
He noted that the Fed’s latest Beige Book indicated that wage pressures are escalating, which of course is good news for the economy. Oil prices might also be on the path to recovery as investors have been rewarding major oil giants for cutting their capital expenditures plans for this year.
Looking for positives for equities
It does seem as if investors have finally gotten the memo about the U.S. economic data. Rosenberg has been saying for weeks that the tides are turning, and he reports that the Investors Intelligence survey finally reads more bullish than bearish with 36.4% bulls and 34.3% bears. The bullish side has grown almost 12 points from the February trough, while the bear side has fallen five points over the last three weeks, he notes. Additionally, he says this is the first time since the beginning of the year that there are more bulls than bears, which he says eliminates part of the problem for equities.
He noted that one positive for equities would be for the earnings revision cycle to change, but unfortunately Wall Street is increasingly pessimistic as the earnings revision cycle for the S&P 500 fell again last month, marking the sixth consecutive decline and the lowest level since April 2009. On the plus side though, Rosenberg said 2009 marked the bottom of the earnings revision cycle, which could mean we are ripe for recovery in this area soon. He adds that analyst upgrades haven’t exceeded downgrades in more than a year.
More signs that inflation may be imminent
The economist also noted several more positive economic data points, like the higher-than-expected private sector employment, which grew 214,000 last month. Services added 208,000 jobs. The payrolls data wasn’t out when he wrote his note on Thursday morning, but since then we learned that that they climbed 242,000, beating Bloomberg’s estimate of 195,000, although one negative indicator was the drop in wages. Unemployment remained at an eight-year low of 4.9%, according to government projections.
The final piece of the puzzle to spurring inflation is wages, and today’s report indicates that there’s more work to be done. However, Rosenberg also noted that the number of people who quit their job voluntarily to take a better-paying one somewhere else has climbed 328,000.
In other words, wages are sure to rise because in order to keep workers, employers will have to pay more to retain them. It’s possible that the wage data will be revised upward, but if it isn’t, we could begin to see wage increases rise soon.
“My friends – the recruiting business is booming right now,” Rosenberg wrote on Thursday morning. “Companies are scrambling for talent, whether or not the stock market has become more hyper this year. Wages for lower-skilled jobs are in a visible uptrend, reinforced by hikes in the minimum wage, but make no mistake – there is a domino effect taking hold up the pay scale.”