Is the Fed winning the battle (employment) while losing the war (price stability)?
Abraham George Macro Musings
The Fed has a dual mandate: achieve full employment and maintain price stability. The market is also scoring the Fed on how they are doing on both these fronts. Therefore the jobs report becomes a matter of focus every month. With the unprecedented double stimulus (monetary and fiscal) and the economy coming out of the beaten COVID restrictions, the expectations for the payroll figures are normally higher every month.
However, in the recent past, the jobs report has come much lower than expectations. But mostly past figures have been getting revised higher too. So there is a lag and some mix up in estimations. For July and August, the “jobs added” numbers were revised upwards. This month the figures again came lower than expectations. Do you think that will force the Fed from changing its mind on tapering that they have announced starting during their November meeting? It shouldn’t happen.
More importantly, the unemployment rate is now below 5% (4.8%). Wage growth came in at an annual growth rate of over 7% for last month. So one can assume the Fed is winning the battle on employment but probably not on the price stability front.
As we have argued throughout, the Fed is complacent and will be chasing inflation in the coming months. There are many costs that were not much of an issue before. Now, there are additional labour costs, supply chain disruptions, freight costs, commodity costs and to top it up, Covid costs that should come to hit the economy hard. Some of these additional costs like supply chain will get sorted out on its own but commodity prices and labour costs will be somewhat sticky. Are companies successfully passing these costs along to consumers? I think so as prices are rising everywhere. Is wage inflation keeping up with these price rises? Probably not. Finally, the balancing act on wage inflation will determine your quality of life.
While the US mandate is to achieve full employment and price stability, it is a different story in China. The aging communist party is all out to gain more power and pushing the social systems to a point where they shouldn’t revolt but have more control over them. In the process, they are killing the entrepreneurial spirit. There is a lot going on in China that we don’t understand. We are mostly driven by headline news. The so called regulatory clampdowns have a much bigger agenda and motive. President Xi and his team are making policy interventions to reshape Chinese society. From a free world standpoint, recent happenings may shock us and we are not sure what is more to come. I will write more on this sometime later but for the time being, I will stay out of any new China investments.
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Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.