Amid Benign Jobless Report: Hint of Wage Inflation? Challenge to Fed’s Easy Money?

YCharts

Net job creation in December came in at 155,000, about as expected, in the Labor Department report released Friday. The unemployment rate ticked up to 7.8%, but that was due to the revision of an older report. While the headline figures were benign, James Paulsen, chief investment strategist at Wells Capital Management, found something potentially unsettling when he read between the lines.

[More from YCharts.com:Dividend Yields to 4.6%, Plenty of Cash on Hand: It’s the PC Industry – Bargains or Value Traps? ]

The annual rate of private-sector wage inflation was 1.7%, the report showed. That marked the largest monthly increase since the recovery began in 2009. Paulsen suggested in a note to investors that it could be a warning that the days of easy Federal Reserve monetary policy are numbered:

[More from YCharts.com:Why Leading Market Strategists See the S&P 500 Hitting 1600 (Or So) in 2013]

“If wages continue to respond as they have in the last 30 years, labor inflation could soon begin a more sustainable rise. Did this start today? . . . Investors should ponder how out-of-line the current Fed policy may appear and how much bond yields may need to adjust upward should the unemployment rate continue a decline towards [about] 7% this year and wage inflation surprisingly begins a sustained rise.”

[More from YCharts.com:Bond Guru Bill Gross’s 2013 Predictions in Charts (Part One)]

The chart below shows the slight steepening in wage growth, together with the yield on the 10-year Treasury bond. For whatever reason, the yield has risen to its highest level in about eight months.

View photo

.
US Average Hourly Earnings Chart

Interest rates are still low by the standards of the last 50 years, and bond investors have done very well since 2007 by not fighting the Fed. Paulsen’s observation suggests, however, that they need to be on guard for when the Fed itself starts battling a new opponent, or really an old one: inflation.

Other than to freak out, what's an investor to make of this? A Fed tightening, of course, could slow the overall economy and make your mortgage costlier to refinance. In stocks, the potential for rising interest rates could hurt highly leveraged companies. A quick use of the YChart Stock Screener (ignore the financial companies it brings up, and focus on operating companies), shows Ford (NYSE:F), WynnResorts (WYNN), Dish Network (DISH) and Campbell Soup (CPB) among those that have done some significant borrowing in recent years.

Conrad de Aenlle, a contributing editor at YCharts, has covered investment and personal-finance topics for more than 20 years, writing for The New York Times, International Herald Tribune, Los Angeles Times, Bloomberg News, Institutional Investor, MarketWatch and CBS MoneyWatch. He can be reached at editor@ycharts.com.

YCharts is a financial terminal for the web, with advanced stock charts, an innovative stock screener and the largest database of economic data on the web.

View Comments (0)