By Benjamin Picton, Senior Macro Strategist at Rabobank
Concerns over price pressures have again been raised over the last 24 hours as we approach the release of the US CPI today. Again, this was most obvious in the crude oil market, where Brent continued its recent bull run to close above $92/bbl following the release of estimates from OPEC+ that the world faces a 3.3m barrel daily shortfall in the final quarter of the year (which echoed what Zerohedge said one week earlier).
One week before OPEC https://t.co/7l8jBsoCbd— zerohedge (@zerohedge) September 13, 2023
Front-month European gasoil futures managed to close above $1000/mt, the highest level since late January when the DXY Dollar index was trading around 102, compared to 104 today. This comes as European diesel imports are on track to hit the highest levels in 8 months.
While oil and diesel prices were hitting new highs, stocks headed lower. The S&P500 lost 0.57% and the more duration-sensitive NASDAQ was down more than 1%, despite 10-year Treasury yields actually pulling back slightly on the day. The German ZEW survey saw respondents a little more upbeat on the future prospects of the economy, but they ranked current conditions as being every bit as bad as they were during the Covid lockdowns (!) The US curve flattened as higher energy prices were priced into short-end yields, but moves in yields over the last few days have been relatively muted (albeit usually higher), so I think it’s fair to say that the market is sweating on the release of that US CPI report before it strikes out confidently in either direction.
The moves in commodity prices have not been lost on one of our favouite bears, Jeremy Grantham. The famed British hedge fund manager spoke virtually to a conference in Sydney yesterday, where he lived up to his billing by saying that US equities were in an AI hype-driven speculative bubble, the probability of a US recession is 70% and that he would be “very careful with real estate all over the world” given that a multi-decade bull market in bonds has driven valuations to “crushingly high multiples of family income”. Grantham singled out commodities as the investment bright spot by suggesting that we now live in a “world of shortages” and that “we are not going to be rolling in commodities ever again.” “We don’t have enough metal to green the world economy... we don’t have enough lithium, cobalt, nickel or copper.”
On the same day that Grantham was speaking, property developer Tim Gurner was also giving his two cents worth at a conference across town. Gurner sparked outrage on the platform formerly known as Twitter by saying that “unemployment has to jump 40 – 50 percent in my view. We need to see pain in the economy... We need to remind people that they work for the employer, not the other way around... Tradies have definitely pulled back on productivity. They have been paid a lot to do not too much in the last few years, and we need to see that change.”
Gurner is known for his controversial takes, but this was a doozy. He’s not Robinson Crusoe in his view though. Incoming RBA Governor Michele Bullock gave a speech back in June where she suggested that the unemployment rate needed to rise to around 4.5% (her estimate of the NAIRU) for inflation to stabilize. We also had some hawkish comments from the BOE’s Catherine Mann recently, where she said that she “would rather err on the side of over-tightening” and that “in my view, holding rates at the current level risks enabling further inflation persistence.” Mann’s comments provide an interesting contrast to Nick TImiraos contention in the Wall Street Journal over the weekend that Fed officials are now broadly happy to err on the side of doing too little, rather than too much.
Mann’s comments might have been timely given the release of the UK labour market report yesterday, which showed year-on-year average weekly earnings were up by 8.5% in July, well above the already spicy 8.2% predicted by the Bloomberg survey. Stefan Koopman, our Senior Macro Strategist covering the UK, released a piece on factor shares last week arguing that neither capital nor labour has the upper hand at present, and that a recession might be just the ticket to sort out the inflation problem. So, maybe Gurner wasn’t too far off the mark?
Whatever the case, animosity between capital and labor is clearly growing and we are seeing workers becoming increasingly assertive in demanding a greater share of the income pie. Who can blame them? As Jeremy Grantham points out, most of gains in labor productivity in recent times have found their way into the pockets of the wealthy, rather than the pockets of workers, and when you can’t buy even a modest home on a solidly middle-class salary, you start to suspect something might be crook.
You don’t have to look far for evidence of this animosity. 140,000 United Auto Workers union members are threatening strike action this week unless the big 3 Detroit automakers accede to their demands for higher pay and improved working conditions. The timing is awkward given the competition automakers face from cheap EVs imported from China, and the worries that central bankers have over cost-push inflation. But the union points to strong profitability in recent years and says it’s time for the companies to pay up. Similar potential strike action by employees on Chevron’s Wheatstone LNG facility in Northern Australia has been giving Dutch TTF natural gas prices palpitations in recent times as potential interruptions to supply work their way through an already tightly constrained global market. Clearly (some) workers now have a lot of leverage, and they are willing to use it to get a better deal.
While all of this is going on, the central Government in Australia is attempting to pass new legislation through the parliament dubbed ‘Same Job, Same Pay’ that is intended to curtail the practice of using labour hire firms to undercut wages, provide right of entry to workplaces for union officials and introduce employee-like wages and conditions for contractors in the gig economy. Business groups, naturally, are united in their condemnation of the proposed changes, but the people who should be most worried are central bankers like Bullock, who have inexplicably lowered their estimates of the NAIRU over the last few years despite clear signs (like this) that labor markets are becoming more rigid, not less. This is a risk I flagged earlier in the year here.
So, for the time being we wait to see what the US CPI report will bring. Are we going to see further price pressures in services? And if we do, will that mean that Nick Timiraos’ “Important Shift in Fed Officials’ Rate Stance’ is short-lived and that Loretta Mester and Catherine Mann have been right all along? Whatever the case, tensions between labor and capital will continue to simmer away.