Increasing Wage Gains Will Keep the 50bps Rate Hikes Coming


    • Treasuries are trading heavy this morning as the Employment Cost Index (ECI) came in above expectations and that is sparking concerns of the dreaded wage-price spiral. That is essentially when fatter wallets encourage more spending which in theory contributes to further price increases.


    • ECI is the broadest measure of compensation costs as it measures just about all aspects of it: wages, salaries, bonuses, other benefits and payroll taxes. It rose 1.4% for the quarter easily beating the 1.1% expectation and the 1.0% print in the fourth quarter of 2021. It was the 1.3% gain in the third quarter that finally pushed the Fed into full hawkish posture.


    • As the graph of ECI below shows, the first quarter print of 1.4% is the highest in data going back to 1996. The annualized rate of compensation gain is now 4.50%. That’s also the highest YoY rate in the ECI data series.


    • While those wage gains are notable, real wages continue to track negative as inflation costs are running hotter. That partially explains some of the sour moods depicted on consumer confidence readings, but the hefty and increasing level of nominal wage growth will keep the Fed eyeing those 50bps rate hikes for the next several meetings as the phrase ”wage-price spiral” starts to be uttered more and more.


    • Speaking of inflation, today’s Personal Income and Spending numbers held some intriguing data on the price picture. Core PCE (the Fed’s favorite inflation reading) rose 0.3% for the month, and the prior month was revised lower to 0.3%. The high print over the past year was April 2021 at 0.62% which will be rolling off the year-over-year calculation as will other high prints in May and June as we work through the year.


    • If we keep replacing those high 2021 numbers with 0.3%-type levels the YoY rates will continue to drift lower.  March’s YoY pace was 5.2% vs. 5.3% expected and a downwardly adjusted 5.3% in February. We are likely to drop into the 4-handle range with April’s numbers and that becomes a lot more palatable. This is another indication that peak inflation is  perhaps behind us and that could work to temper some of the more aggressive rate-hiking scenarios.
Employment Cost Index



Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 2.72 2.93 3.03 3.20 3.40 3.86
0.50 2.71 2.90 2.97 3.08 3.26 3.75
1.00 2.70 2.87 2.94 3.04 3.17 3.62
2.00 2.86 2.89 2.96 3.05 NA
3.00 2.91 2.99 NA
4.00 2.94 NA
5.00 2.90 NA
10.00 NA

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Published: 04/29/22 Author: Thomas R. Fitzgerald