Wages are picking up – but the market still can’t believe it

Around the world, things are looking up – employment is high and wages are rising. But investors remain fearful. John Stepek explains what’s going on.

Employment is high and wages are rising

It was the best of times, it was the worst of times...

Don't worry, I'll stop there.

Around the world things are looking up. Several developed economies (including the UK) are running at full employment, or as near as you can get.

Yet I think it's fair to say that everyone is grumpy. More than that, they're fearful. They're scared of missing out. But they're scared of getting sucker punched again.

And it's giving rise to some pretty odd things happening in markets.

Don't let your confirmation bias blind you this is a good report on jobs

Jobs data for the UK in the final quarter of 2018 came out yesterday. Given the constant litany of grim headlines, it was staggeringly good.

The employment rate is at 75.8%. That's the highest since comparable records began in 1971. The overall unemployment rate fell to 4%, the lowest since 1975. For women, it fell below 4% for the first time ever.

The percentage of "economically inactive" (those aged 16-64 who are not working nor seeking work) came in at 20.9%, another record low. The number of people on zero-hours contracts fell too.

Meanwhile, the most important measure from a "big picture" point of view wage inflation headed significantly higher. Weekly pay (both including and excluding bonuses) rose by 3.4% compared to the same time the year before.

This means that real wages wages after inflation are rising at their fastest rate in two years. They are also rising more rapidly than house prices.

Wage inflation matters, because if anything is likely to push both growth and wider inflation higher, it's people being paid more. And finally, it seems that the labour market is sufficiently tight that wages are indeed picking up.

Incidentally, if you're sitting there furiously looking for "ah, buts", I have some advice for you. Picking holes in these releases is commendable. It's good to be sceptical. And all of this data is historic; it says nothing about what will happen tomorrow.

But also remember that you have to deal with the world as it is. You may not like the Tories; you may not like Brexit. You may feel that this statistical release must surely be covering up some great yawning chasm in the social fabric.

But the data collection methods haven't changed much, and for now, the data points to an economy which has a high level of employment and rising wages. And importantly, Britain is not unique.

Who will win the tug of war in markets?

These are good numbers by anyone's definition. And they highlight an absolutely fascinating tug of war going on both here and in the wider world.

It's hard to describe global labour markets in most developed countries as anything other than "hot". Britain is not the only one, for all the cries of "despite Brexit!" or "we haven't left yet!"

Lift your eyes from our current parochial obsessions and you will find that not only the US but also Japan the land that pay rises forgot are seeing ever-tightening labour markets combined with slowly but steadily growing wages.

This really should be toxic for bond markets. Bonds are mostly fixed-income instruments (ie, they pay you a specific interest payment that does not rise or fall). As such, they hate inflation. If you know a bond is going to pay you £50 in a year's time, then you want prices to be lower, not higher. If prices are expected to go up, the value of that bond will fall.

But that's not happening right now. Instead, as Daniel Kruger pointed out in the Wall Street Journal a couple of days ago, bond yields have been sliding since October (which of course, is when stocks fell out of bed).

This has resulted in the proportion of bonds which offer negative yields (where bond owners are effectively paying the issuers mainly developed world governments for the privilege of lending to them) rising yet again.

The proportion of global debt offering negative yields (according to BoA Merrill Lynch) was virtually zero until 2014. It peaked at just under 30% in September 2016, around about the time we hit "peak deflation" fear. Since then, it has managed to dip below 19% in July 2017, and October 2018. But now it's back up above 22%.

As David Rosenberg of Gluskin Sheff pointed out on Twitter yesterday, it's no wonder that stockmarkets have been surging in the last month it's because low bond yields mean that "TINA" ("there is no alternative" if you want to make a "real" return) is back.

So what's going on? On the one hand, investors seem to have grown certain that we're facing a global downturn any minute now. So that might explain why bond yields are low. Employment is a lagging indicator, after all it doesn't peak until after the tough times are already clearly on the horizon.

On the other hand, the mass retreat of central banks could have something to do with it. If you think they're all going to start buying bonds again, then you want to get in ahead of them.

I suspect it's a mix of both. The financial system and the "real" economy have always been "reflexive" (moves in one affect the other). But the era of quantitative easing and the increasingly uncertain nature of money have exaggerated this reflexiveness.

It's a little bit Orwellian. Investors look at the sky and see sunshine, but bond yields tell them it's raining. They're no longer entirely sure what to believe.

The good news is that this isn't 1984. At some point, the evidence will swing hard one way or the other, and we won't be able to ignore it. I'm still betting we'll get inflation. You may disagree but that's why we make sure we have diversified portfolios, so even when one of us is wrong, neither of us ends up being ruined.


How long can the good times roll?

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019
The British equity market is shrinking

The British equity market is shrinking

British startups are abandoning public stockmarkets and turning to deep-pocketed Silicon Valley venture capitalists for their investment needs.
8 Nov 2019
Cash rich and bored? Be careful what you do with your money
Investment strategy

Cash rich and bored? Be careful what you do with your money

As the pandemic has left many people with more time on their hands but little opportunity to spend, they have been speculating in the markets. But don…
19 Oct 2020
Negative interest rates and the end of free bank accounts
Bank accounts

Negative interest rates and the end of free bank accounts

Negative interest rates are likely to mean the introduction of fees for current accounts and other banking products. But that might make the UK bankin…
19 Oct 2020

Most Popular

The Bank of England should create a "Bitpound" digital currency and take the world by storm

The Bank of England should create a "Bitpound" digital currency and take the world by storm

The Bank of England could win the race to create a respectable digital currency if it moves quickly, says Matthew Lynn.
18 Oct 2020
What would negative interest rates mean for your money?
UK Economy

What would negative interest rates mean for your money?

There has been much talk of the Bank of England introducing negative interest rates. John Stepek explains why they might do that, and what it would me…
15 Oct 2020
Last chance to secure a Bounce Back loan for your small business
Small business

Last chance to secure a Bounce Back loan for your small business

The government’s Bounce Back loan scheme will only run for another six weeks. Act now if you need to take advantage of it.
16 Oct 2020