Let’s turn our attention to wages. Average hourly earnings (AHE) rose at an annual rate of +2.6% in February, following a downward revision of 0.1 percentage points for the prior month. In other words, the +2.9% surprise to the upside in January has now been dialed back a bit to +2.8%.
Remember, one of the lynchpins behind the rise in the UST 10-Year yield this year was an increase in inflation expectations, led by said “January surprise.” The current pace leaves wages essentially “stuck in the mud,” at least for the time being, illustrated by the fact that the average year-over-year increase over the last two years has been that same +2.6% (see the graph).
So, when will that jobs trend translate to higher wages? According to the new Fed chair, a key force behind the frustrating lack of significant progress has been the result of “the weak pace of productivity growth in recent years.”
Powell also stated that given the economic backdrop and strong job creation, he expects to see wages rising. This line of reasoning is definitely justified, but thus far, the results have been lacking. Nevertheless, there does seem to be an expectation that later this year, the annual rate of increase for AHE will eventually hit, and possibly eclipse, the +3.0% threshold.
The bottom line is that, barring any unforeseen circumstances, the Fed will not be dissuaded from raising interest rates this year, a development expected for next week’s FOMC meeting.
This article was republished with permission from Wisdom Tree.