Why wage growth is the Fed’s key jobs data metric: Strategist


On Friday, the US Bureau of Labor Statistics will release jobs data to the public. HSBC Chief Multi-Asset Strategist Max Kettner joins The Morning Brief to give insight into the Fed as it anticipates new jobs data, and to discuss how investors can use this information to take advantage of the market.

“So I don’t think the labor market data, per say, whether that’s jobless claims, ADP, or job openings, or non-farm payrolls, I don’t think that’s too crucial, as long as really wage growth doesn’t go in the wrong direction,” Kettner says.

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Editor’s note: This article was written by Nicholas Jacobino

Video Transcript

This has been a huge week for some of the labor market data. If we get to Friday, we get another hot reading. What does that do for the Fed’s tenor?

MAX KETTNER: Yeah, I think– look, to the Fed, I think the more important thing really is what’s going on with wage growth right now. It’s not really important whether NFPs will be at 200 or 250 or 300 as long as wage growth doesn’t print like 0.4, 0.5 month-on-month for a couple of months. I think they’re fine with that. In fact, they probably can tap themselves on the shoulder and say, Great, well done, we’ve landed the plane. Right now the labor market is still pretty strong. It’s no longer as ridiculously booming as it was perhaps 9 to 12 months ago. The unemployment rate has ticked up a bit. Job openings have gone down a bit. So there has been some normalization, but clearly without really significant pain.

So they can really tap themselves on the shoulder and say, hey, look, we’re bringing inflation down. Wage growth, not really re-accelerating. But in terms of the labor market strength, that’s still there. So we didn’t actually destroy anything. So I don’t think the labor market data per se, whether that’s jobless claims, ADP, or job openings, or nonfarm payrolls, I don’t think that’s too crucial as long as really wage growth doesn’t go the wrong direction.

Max, when you take a look at the run up that we’ve seen in commodity prices during all this. We have oil moving to the upside. We have gold hitting the highest levels that we’ve seen in quite some time, record highs there. Is there a buying opportunity still within the commodity space? And how much– I guess, how complicated do you see maybe this run up in oil, making the Fed’s playbook here, or making the job tougher for the Fed to tame inflation?

MAX KETTNER: Yeah, not quite yet. On the oil side, yes, there will be probably– or we will be moving from disinflationary effects from energy prices to inflationary effects, but they’re not going to be crazily inflationary. It’s not like let’s say how we switched from 2020 to 2021, right where we went from massive, massive, almost like -60% year-over-year base effects and inflation. And we went all the way to like– I think, it was at some point 150%, 200% year-over-year plus. That’s not going to be– we’re moving from -20 to plus 20, which is, yes, at the margin, not great. But it’s not going to move the needle that much. I think overall, we’re still really bullish on energy, still bullish on oil.

Bear in mind, positioning is still pretty low. It’s just starting to rise from a multi-decade low, the positioning from asset managers, when we look at other things, let’s say, jet fuel demand. So things like intentions to travel are still really strong. So therefore, jet fuel demand should also still be pretty high. So a lot of things are still, I think, speaking in favor of oil.

But overall, it’s not going to derail the risk asset picture overall because, let’s face it, doesn’t really matter that much whether the Fed will cut two or three or four times as long as they start cutting this year. That’s the really crucial thing. As long as they start cutting and saying, look, we are on a rate cut path. But it might just take a bit more time. That’s enough for risk assets, I think, to get a bit of a relief rally.

Max, we only got about 30 seconds left here. Does a less cuts than expected reality trigger any type of portfolio repositioning from your perspective?

MAX KETTNER: No I don’t think so, because what we’ve seen is really– let’s say, compared with September, October, last year, we had a bond supply shock. We had inflation moving the wrong way. We had the Fed suddenly signaling a December hike, and the S&P went down peak to trough, not even 10%. So now we are not really having these shocks, and we’ve got better growth. So I don’t other than a couple of percent of a setback in equities, perhaps a handful of basis points and high-yield and credit spreads, fine. But those are the dips that you really want to get back into.



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