What You Need To Know About Next Week’s 3 Key Events

After a relative slow week following the announcement of the ECB’s new initiatives and the US jobs data, the week ahead is chock full of key events. There are three in particular that can shape the larger investment climate.  They are the FOMC meeting, the launch of the ECB’s Targeted Long-Term Repo Operation (TLTRO), and the referendum on Scottish Independence.

I.

The key issue around the FOMC meeting is the susceptibility of the forward guidance to change now that QE is drawing to a close.  In particular, there are two elements that are being debated.  First, in July, the FOMC statement cited the “significant under-utilization of the labor resources.”  Is this still a fair characteristic of the labor market?  The statement was issued on July 30.  There have been two monthly cycles of employment data.  Taken as a whole, the data show continued improvement, though not acceleration.  The labor market is healing, but it still does not appear to be in robust health.  

Indeed, there is some risk that the pace of improvement slows.  Non-farm payrolls peaked in April (304k) and have been down two consecutive months in July and August. While it is well-appreciated that August’s initial estimate is often revised higher, what is less well recognized is that in six of the past nine years, jobs growth in September is lower than in August.

Weekly initial jobless claims put in their cyclical low (thus far) in mid-July.  They have been gradually trending higher, and last week moved above the 26-week moving average for the first time since early May.

Since Yellen’s discussion at Jackson Hole, more economists are talking about pent-up wage deflation. It is the idea that during the contraction, nominal wages did not fall as much as they “should” have to clear the market.  The implication is that the lack of wage pressure now reflects that wages were too high previously.  In turn, this means that the present lack of wage pressure should not be confused with the degree of tightness in the labor market.

At the same time, the fact that wages are sticky in both directions is consistent with a non-economic hypothesis about wages.  Simply, even if crudely, put, wages reflect the relative power of the employee and employer.  Despite the concern apparent heightened concern about the concentration of wealth and income and the framing of the of issue and debate by Picketty, it appears to have intensified in recent years.  The social product (GDP) is growing slower, but the elites share has grown.   This is clear from the continued divergence of wages and profits, and the increased wealth in absolute and relative terms since the end of the Great Financial Crisis.  

The second part of the Fed’s statement that will be closely watched is the reference that rates can remain low for a “considerable time” after QE ends.  This has been a contentious issue for a number of regional Fed presidents.  Many economists look for this to be dropped in the statement that will be released at the conclusion of the FOMC meeting on September 17.  If it is dropped, the market will quickly conclude that a rate hike has indeed been brought forward.  The idea would be a Q1 15 hike instead of mid-year.   This would likely see an increase in short-term yields and a bearish flattening of the yield curve.  It would likely spur a dollar  advance.