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RussianJust as the market was getting excited about the pick-up in the US labour market and the wave of spending this could unleash on the economy, gas prices throw a spanner in the works ...
The chart below shows annual earnings growth (white line) and average gas prices in the US (orange line).The chart is normalised and shows how the two move together. As you can see, since November gas prices have crossed above earnings growth for the first time in 3 years.
Annualised earnings growth (white line) and gasoline prices (orange line) - normalised.
This gap between wages and gas prices has widened considerably since January and with US oil prices up at $108 per barrel gas prices are likely to remain elevated or even rise further for some time to come.
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The fact that gas prices are outpacing wage growth is significant as it will 1, eat into consumers' disposable incomes and 2, increase companies' cost base thus forcing them to look for savings elsewhere - such as wages.
Job creation is only one aspect of the labour market recovery. For now, we crucially haven't seen wages pick up in any meaningful way. Added to this, not all Fed members are happy with the improvement in the labour market. New York Fed President Dudley - arguably the second most important member of the Fed - said that the Bank is still "pretty far away" from its full employment mandate during a speech in Puerto Rico on Friday afternoon.
This is why we believe the Fed may be committed to 1, completing QE2 and 2, keeping rates low for a prolonged period.
Market impact:
There is no denying that the boost to payrolls is a positive for risk assets as the US economic outlook brightens and this may well be enough to sustain a further leg higher in risky assets. However, once the dust settles the spotlight may fall on lacklustre wage growth in the US, which could weigh on Treasury yields. 2-year Treasury yields have come off after failing to break through the 0.8% level - the level that proved too hard to beat back in February.
If yields don't break convincingly above the 0.8% mark we think that USDJPY in particular will find it hard to keep momentum going and rise towards 85.00 and beyond. Good support levels include: 83.50 - 200-day moving average then towards 82.50. We think this pair is likely to remain range bound for the coming weeks, at least until all of the component parts are in place for a healthy labour market recovery.
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