Why Morgan Stanley Threw Up All Over Those “Great” Rising Earnings
by Tyler Durden
Following last Friday’s disappointing payrolls report, the punditry was understandably focused on the silver lining: the 0.4% monthly jump in average hourly earnings, which translated into a 2.9% annual increase in hourly earnings – the hottest since the financial crisis. The strong increase in earnings was quickly interpreted by the sellside as the latest indication rising inflation has arrived, and that more rate hikes are imminent.
Alas, that was only part of the story.
As we showed shortly thereafter, the reality is that the wage growth had mostly benefited supervisory and management level workers – who comprise only 18% of the labor force – and whose average hourly earnings soared by a record 4.7% Y/Y. Meanwhile, the earnings of the vast majority of US employees, those production and non-supervisory workers who make up 82% of the workforce, remained stuck in the doldrums, rising by a far less exciting 2.5%, or the same growth rate observed for the better part of the past 3 years.
This prompted us to, sarcastically, note that the Fed should unveil one rate hike for America’s higher earning workers, whose wages are being “inflated”, while keeping rates unchanged (or cut), for more than 80% of the labor force.
We also noted something tangential, namely that in our analysis, “we did not discuss something which may be even more troubling: while average hourly earnings are indeed rising (if mostly for managerial employees), on a weekly basis, there is barely any earnings growth. This means that the only reason why wage growth appears to be rising, if purely for optical reasons, is because number of hours worked continues to decline, hardly an indicator of a stable recovery.”
Yet while we did not touch on this topic (which we have dissected on various previous occasions), over the weekend Morgan Stanley’s economist Matthew Hornbach did discussus precisely that, and was not impressed.
According to Hornbach, who echoed virtually all of our sentiments, “the current market pricing reflects an overly optimistic interpretation of the average hourly earnings data from the December employment report.”
Exhibit 13 shows how average hourly earnings increased to a new cycle high at 2.93%. However, Exhibit 14 shows how this increase was due to a combination of an uptick in average weekly earnings and a downtick in average weekly hours. More broadly, the increase in average hourly earnings since the beginning of 2015 has been mostly due to the fact that average weekly hours have fallen.Remember, average hourly earnings is a ratio of average weekly earnings to average weekly hours. The ratio has been going up because the denominator has been going down – not because the numerator has been going up!
His conclusion: “we suggest investors look to fade the market reaction to the December employment report over the coming weeks in the 2- to 5-year sector of the curve. Our bond market indicators are neutral on duration across the 7 markets we follow (see our BMI update in European Interest Rate Strategist: Growth and Supply Headwinds). So our suggestion to fade the post-payrolls move is not geared at going long duration, per se.”
Ours conclusion… The same as last Friday, when we said that “when the Fed sits down next time to pats itself on the back for a job hike well done in hopes of “keeping inflation in check”, it may want to hike rates only for those 18% of workers who are benefitting from rising wages, because for the rest of America, the income picture remains as dreary as it has been for years.”
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About the writer Tyler Durden