Trader's thoughts - The long and short of it

A major macro bias, but the highest impact news across Aussie markets yesterday came in the form of local Wage Growth Index data, which missed expectations.

Market data Source: Bloomberg

ASX to re-test multi-month highs

SPI Futures are indicating a modest 9-point gain for the ASX 200 this morning. The gusto that brought the index above 6100/05 resistance evaporated on Wednesday. Weaker wage growth numbers seemingly inhibited the market’s momentum: coupled with some softer earnings from some of the major retailers, the consumer sectors were two major laggards for the day. Rallying commodities, and well received earnings from BHP, helped the materials and energy sector rally, and offset some of the overall market’s losses. But judging by the price action, taking profit at a new multi-month high around 6125 appeared the prevailing bias. In what is a positive for the bulls, another challenge of that key 6100/05 resistance level is on the cards this morning – and ought to be broken again if Wall Street can close strongly.

An abundance of news and data

There was a slew of corporate and economic data coming out of Australia yesterday. The differing implications of each meant a total market-defining narrative to drive price action was missing. It’s a pretty common function of trading equities and indices during corporate earnings season: shifts in the fortunes of individual stocks can cause less-fluid price action in the market. It’s a dynamic that will continue for as long as earnings – and micro-level concerns – take priority over the overarching themes bringing about short-term gyrations in global markets. Themes such as the trade-war, global growth, and monetary policy will return to the fore eventually, making the index (relatively) simpler to trade. But until earnings, and more importantly guidance, is understood and priced into the market, yield and momentum chasers will keep to the sidelines.

The big concern: Wage growth

A major macro bias, but the highest impact news across Aussie markets yesterday came in the form of local Wage Growth Index data, which missed expectations. There is an ever-increasing interest in wages data in Australia, especially since the RBA put it at the centre of its focus when considering domestic economic and monetary policy conditions at its last meeting. Yesterday’s numbers were underwhelming, albeit far from dire, revealing that on a quarterly basis, wages grew at 0.5%, against a consensus estimate of 0.6%. When compared to other market moving events, the disappointing print failed to inspire tremendous activity in Australian markets, it must be said. However, following the RBA’s recent implorations that wage growth must pick-up to sustain economic health, what the numbers did reveal to traders was slightly worrisome.

Waiting for the pay rise

It’s because that to tackle the stifling effects of falling property prices, slowing credit growth and climbing private debt, an increase in worker’s pay is required to ensure adequate aggregate demand within the local economy, according to the RBA. Conventional wisdom suggests that wages growth shouldn’t be too far away considering the current state of the labour market. Notionally full employment will lead to the reduction of slack in the Australian economy, and boost competition for labour in such a way that bids up wages. It could be an assumption that gradually proves true, especially if the unemployment rate falls to the circa 4.75% mark that the RBA expects it to. The recent precedent set by other developed economies though – primarily the US economy – suggests that this may be slow to manifest.

William Phillips, please do your thing

The matter of sluggish wage growth within developed economies is one of the great modern subjects of debate in economics. The famous Phillips Curve, which suggests inflation should rise as unemployment falls, has proven a less than reliable model to understand and predict labour, wage and inflation dynamics in the past decade. An alternative (but well known) explanation for what is keeping wage and price growth subdued is this: the globalizing of markets has attracted an influx of cheap labour, creating an over-supply in the global economy; capital, in a search to maximize profit, has been directed when possible to places where labour is abundant and cheapest; when cheap labour can’t be utilized, mostly due to business models that depend-on local or more-sophisticated labour, automation takes place in order to sustain profitability instead.

Unemployment data on tap today

The arrangement leads to a set of circumstances whereby although nominally full-employment is achieved, labour is underutilized. Wages don’t grow consequently, dragging on other areas such as consumption, investment and savings. There is still hope from policy boffins that the described phenomenon will prove transient, and that the outlook for wage growth, and all the areas it impacts, will progressively improve. Of course, it won’t be remedied today; but employment numbers released this morning will contribute to the evolving narrative. The Australian economy is expected to have added 15k jobs last month, enough to keep the unemployment rate to around 5%. With traders pricing that the next move from the RBA will be a cut, a pull back in the AUD, or further falls in ACG Bond yields, may be what to watch for today.

If FOMC is dovish, then markets can stay bullish

As far as the AUD goes, it’ll be more determined by USD activity and speculation regarding the US-China trade war, beyond all else, in the short term. Case in point: the AUD has pulled back slightly this morning after the USD rallied following the release of January’s FOMC Meeting minutes. As far as the minutes go, they have been well received in markets so far. In essence, nothing too surprising has been communicated by the Fed in their minutes – they confirm ultimately the cautiously optimistic, but explicitly dovish stance the central bank adopted at the January meeting. Though the (seemingly) inexorably downgrades to forward earnings will inhibit sentiment on Wall Street, for now an accommodative Fed is giving traders the permission to take risk and search for yield.


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