Despite encouraging signs, the supply-demand rebalancing in the US labor market remains too slow to make the Fed falter. The task of central banks is, however, complicated by growing fears about financial stability.
The recent flurry of US economic indicators paints a picture of a US economy that is still solid, but with a reduction in supply-demand imbalances in the goods and services markets and in the labor market (graph 1). The level of stocks seems more and more normal, delivery times also, and pressures on prices are moderating. Job vacancies also fell sharply in August after rising slightly in July.
A sufficiently rapid continuation of the downward trend in these job offers is one of the necessary conditions often cited by the Fed for controlling wages. Note however that, smoothed over the last few months, the rise in hourly wages seems to have stabilized at around +4.5% annually (Chart 2). This is certainly more than the +3%-3.5% increase before Covid, but it is also significantly less than the +6% at the start of the year. These figures are not reassuring enough to lead the Fed to change its tune, but they do suggest that it may not be necessary to make monetary policy ultra restrictive with, for example, interest rates of 5% or more to achieve the expected normalization.
While waiting for the next inflation indices, investors will however continue to worry about the implications of the rate hike on financial stability. For reasons both of the magnitude of the rise in yields and the very high sensitivity of bond prices to these rises in yield when rates are still low (duration effect), the year 2022 will go down in history as the most big bond crash in modern history (Chart 3). The first signs of pain came at the end of September from the “LDI” (Liability Driven Investing) funds which assisted British pension funds in their asset-liability management. It is impossible to know if other market segments will give such serious warning signals in the weeks to come, but there is no doubt that after this episode risk control will be accentuated in financial institutions. These controls will keep the markets under a high risk premium regime. Investors will be particularly attentive to the English situation in this respect, the Bank of England being supposed to stop its support for the market for long-term treasury bills from October 14, then to raise its short-term interest rates sharply on November 3. (read more)
Source: Fibee
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