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Today’s nonfarm payroll and wage statistics point to solid growth for the US economy. At 200,000 jobs, January employment gains were above consensus, and average hourly earnings surprised to the upside, growing 2.9%, a cycle high.1 Invesco Fixed Income has been very positive on US growth in the last several quarters, and these results support our view. January wage data were generally in line with our “wage tracker” model, which has been pointing to consistent (although slow) gains in wages. Today’s robust jobs numbers support our forecast that the US economy could grow by around 2.75% in 2018.
So what does this mean for inflation? Higher wages are supportive of inflation over the medium term. Today’s wage report may raise confidence that inflation will reach the US Federal Reserve’s (Fed) 2% target in the long term. However, wage gains can take a long time to translate into actual price increases for consumers. Overall, Invesco Fixed Income is maintaining its six-month outlook for inflation, and we estimate that inflation will likely remain at around 1.7% for the first half of 2018. However, if we see persistent wage increases going forward, we may raise our inflation forecast for 2018 above our current expectation of 1.8%.
In terms of interest rates, we believe today’s data affirm the Fed’s expectation of three interest rate hikes in 2018. It also increases the chances that the Fed will revise up its view of how high the federal funds rate could ultimately rise. If wages continue to rise sharply, the Fed hiking cycle may extend into 2019 and 2020, and could be at a faster-than-expected pace. Increased expectations of further rate hikes in the medium term and perceived higher inflation risk could steepen the US Treasury yield curve and push interest rates higher.
Average hourly earnings ticking up
1 Source: US Department of Labor, Jan. 2, 2018
Blog header image: MikeDotta/Shutterstock.com
The yield curve plots interest rates, at a set point in time, of bonds having equal credit quality but differing maturity dates to project future interest rate changes and economic activity.
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Fixed income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating.
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James Ong, CFA
Senior Macro Strategist
Derivative Portfolio Manager
James Ong is a Senior Macro Strategist and a Derivative Portfolio Manager for Invesco Fixed Income (IFI). Mr. Ong contributes economic and market analysis to the Macro Research platform. Mr. Ong leads IFI derivative strategy and oversees derivatives held in IFI portfolios.
Mr. Ong began his investment career in 2001. Prior to joining Invesco in 2014, he was a senior vice president, a senior portfolio manager and a senior trader at Hartford Investment Management Company.
Mr. Ong earned his BA degree in economics from Middlebury College. He is a CFA charterholder.
Noelle Corum, CFA
Invesco Fixed Income
Noelle Corum joined Invesco Fixed Income in August of 2010 and is involved in derivatives, FX and rates trading, macro view implementation and asset allocation.
Ms. Corum began her investment professional career at Invesco following her undergraduate studies.
She earned a BS degree in business administration, with a concentration in financial analysis, from Saint Louis University, where she minored in mathematics and earned a certificate in service leadership.