The consensus headline figure for Friday's NFP release is 234K, but I will be paying far less attention to that number than the Average Hourly Earnings figure, which will be released at the same time. That's because the Fed has been watching wage growth for signs of rising inflation.
Core PCE, which is the Fed's favorite inflation metric, was released on Monday, and it unexpected dived:
If rates are on track for a June lift-off, which seems to be Yellen's base-case scenario, we need to see some justification in the form of wage pressures. The Q4 2014 Employment Cost Index, which is arguably a better measure of wage inflation because it is a fixed-weight measure and adjusts for shifts in employment categories, came in at 0.6% (vs. 0.7% for Q3). While that does represent a deceleration in the ECI, the YoY change was 2.3%, which is well above the Fed's 2% inflation target.
By contrast, Average Hourly Earnings is not a fixed-weight measure of wages, and therefore, it does not represent an apples-to-apples comparison of wage pressures. As an example, higher growth in low-wage jobs will depress Average Hourly Earnings compared to the ECI. Nevertheless, it is a monthly series, and provides more frequent readings than the quarterly ECI.
The December YoY change in Average Hourly Earnings was unusually low. I will therefore be watching the January release carefully to see if December was a statistical blip (and to see if December gets revised upward.)
On one hand, inflation measures falling. On the other hand, the news of impending strikes in the oil industry is a sign of the strengthening bargaining position of labor and a sign of resurgent wage pressure. Other signs of wage pressures are showing up in the restaurants and hotel sector:
As per Goldman Sachs, wage pressures indicators are all pointing up, but the Fed needs more confirmation from the data. That's why Friday's release of Average Hourly Earnings in the NFP report will be the most important number to watch.
This may turn out to be inflation's last stand, or the beginnings of resurgent wage inflationary spiral that solidifies a June target for a Fed rate hike.
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