Charts of the Week: Bad News for Equities, Slowing US Wage Growth, and a Tight Housing Market

Summary

• The return of the energy-core inflation correlation is bad news for equities.
• Despite a tight US labour market, wage growth has slowed.
• The US housing market is at historic tights, despite Federal Reserve (Fed) rate hikes.
• Transport services is likely to be the main drag on Eurozone (EZ) core and services inflation.

Energy-Core Inflation Correlation Reappears

Since the pandemic, the correlation between energy and core inflation has reappeared. This correlation was strong in the 1970s and 1980s, disappeared in the 1990s and 2020 and made a comeback in 2021 after the CPI crossed 5% (Chart 1). Given the likelihood that energy prices rise again in H2, Dominique expects inflation to accelerate – that is bad news for equities at it will force the Fed to tighten more aggressively.

A Tight US Labour Market, But No Wage Growth

Despite a tight US labour market, May’s NFP shows wage growth slowed to 4.3% YoY from 4.4% YoY in April. This could reflect disinflation. Average wages are slowly declining but by less than the CPI. As a result, real wages are rising (Chart 2). Workers gains are shown by an increase in the income share of labour and a decrease in that of corporate profits (Chart 3). In sum, disinflation is allowing workers to increase their income share with stale wage growth.

US Housing Market Is Tight, Despite Rate Hikes

The US housing and apartment markets are at their historic tights, even though you would expect softening due to rate hikes. Both vacancy rates and existing homes supply up for sale are near record lows (Chart 4). The turnover in the housing market as depicted by existing and new home sales and the MBA purchase index are also not accelerating. Real time indicators of rental rates, such as the Zillow.com index of apartment rents, are coming back higher after dipping lower earlier in the Fed cycle.

Germany Suppresses EZ Services Inflation

Eurozone (EZ) CPI dropped to +6.1% YoY in May, while core CPI dropped to +5.3% – both 0.2pp below market expectations. Adding to the dovish feel was the 0.2pp drop in YoY services inflation to +5.0%. But what is driving the disinflation?

We get a breakdown on Tuesday. Transport services is likely to be the main drag on EZ core and services inflation, having fallen sharply on the back of the German €49 ticket. The €49 ticket constitutes a one-off factor in EZ services inflation that will not be present in next month’s data. Moreover, the base effects from last year’s €9 ticket should see the YoY accelerate sharply next month (Chart 5).

Matthew Tibble is Commissioning Editor at Macro Hive. He has worked as an editorial consultant and freelance editor for companies such as RiskThinking.AI, JDI Research, and FutureScape248.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)