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Michael Gayed: Will Payrolls Spark Inflation?
Payroll data was strong, and inflation expectation may be ticking up, but will it stick without wage growth?
Michael A. Gayed    

Inflation is the one form of taxation that can be imposed without legislation.
-- Milton Friedman
 
Headline payroll numbers today were strong, and talking heads all over the place are excited. Indeed, it was a solid beat, and we should all cheer more hiring in the US economy. However, quantity isn't enough. For true reflation to occur, there also needs to be quality beyond straight-up payroll growth. Average hourly earnings went nowhere fast, and that's undeniably still a cause for concern, combined with no lengthening in the average hourly workweek and falling participation rate.
 
Long-duration bonds aren't buying it so far, although admittedly the headline number may still be enough to push more money into equities. This is one of the more unusual junctures, given various areas of the investable landscape that have behaved as if a correction has been under way at the same time broad large-cap indices have held on strong. Treasuries further out on the curve have strongly outperformed. As noted in "An Intermarket Approach to Tactical Risk Rotation," the third-place-winning Wagner Award paper that I coauthored, when Treasuries do well, you tend to have higher volatility in stocks after strength has occurred. Of course, this isn't a guarantee, but the odds do increase.
 
In a honey-badger stock market, though, nothing matters. Perhaps the "overbought" nature of defensive sectors and Treasuries is about to be undone, and in the very near term provide an opportunity for stocks to try for another leg higher. The most bullish sign out there is a minor pickup in inflation expectations, which Treasury inflation-protected securities (TIPS) can help get a sense of. Take a look below at the price ratio of the iShares Barclays TIPS Bond Fund ETF (NYSEARCA:TIP) relative to the PIMCO 7-15 Year US Treasury Index Fund (NYSEARCA:TENZ). As a reminder, a rising price ratio means the numerator/TIP is outperforming (up more/down less the denominator/TENZ).


Click to enlarge

If this trend continues, investor sentiment would likely continue to be supportive of risk-taking; however, the above has had many fits and starts in the past. Inflation expectations matter because they tend to be the conditions under which investors favor stocks versus bonds. Last year was a notable exception given very real deflationary behavior, but historical intermarket relationships appear to be normalizing. 
 
Strong payrolls? Check. Wage growth? Nope. Reflation? Remains to be seen.

Twitter: @pensionpartners
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No positions in stocks mentioned.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

Michael Gayed: Will Payrolls Spark Inflation?
Payroll data was strong, and inflation expectation may be ticking up, but will it stick without wage growth?
Michael A. Gayed    

Inflation is the one form of taxation that can be imposed without legislation.
-- Milton Friedman
 
Headline payroll numbers today were strong, and talking heads all over the place are excited. Indeed, it was a solid beat, and we should all cheer more hiring in the US economy. However, quantity isn't enough. For true reflation to occur, there also needs to be quality beyond straight-up payroll growth. Average hourly earnings went nowhere fast, and that's undeniably still a cause for concern, combined with no lengthening in the average hourly workweek and falling participation rate.
 
Long-duration bonds aren't buying it so far, although admittedly the headline number may still be enough to push more money into equities. This is one of the more unusual junctures, given various areas of the investable landscape that have behaved as if a correction has been under way at the same time broad large-cap indices have held on strong. Treasuries further out on the curve have strongly outperformed. As noted in "An Intermarket Approach to Tactical Risk Rotation," the third-place-winning Wagner Award paper that I coauthored, when Treasuries do well, you tend to have higher volatility in stocks after strength has occurred. Of course, this isn't a guarantee, but the odds do increase.
 
In a honey-badger stock market, though, nothing matters. Perhaps the "overbought" nature of defensive sectors and Treasuries is about to be undone, and in the very near term provide an opportunity for stocks to try for another leg higher. The most bullish sign out there is a minor pickup in inflation expectations, which Treasury inflation-protected securities (TIPS) can help get a sense of. Take a look below at the price ratio of the iShares Barclays TIPS Bond Fund ETF (NYSEARCA:TIP) relative to the PIMCO 7-15 Year US Treasury Index Fund (NYSEARCA:TENZ). As a reminder, a rising price ratio means the numerator/TIP is outperforming (up more/down less the denominator/TENZ).


Click to enlarge

If this trend continues, investor sentiment would likely continue to be supportive of risk-taking; however, the above has had many fits and starts in the past. Inflation expectations matter because they tend to be the conditions under which investors favor stocks versus bonds. Last year was a notable exception given very real deflationary behavior, but historical intermarket relationships appear to be normalizing. 
 
Strong payrolls? Check. Wage growth? Nope. Reflation? Remains to be seen.

Twitter: @pensionpartners
< Previous
  • 1
Next >
No positions in stocks mentioned.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

Michael Gayed: Will Payrolls Spark Inflation?
Payroll data was strong, and inflation expectation may be ticking up, but will it stick without wage growth?
Michael A. Gayed    

Inflation is the one form of taxation that can be imposed without legislation.
-- Milton Friedman
 
Headline payroll numbers today were strong, and talking heads all over the place are excited. Indeed, it was a solid beat, and we should all cheer more hiring in the US economy. However, quantity isn't enough. For true reflation to occur, there also needs to be quality beyond straight-up payroll growth. Average hourly earnings went nowhere fast, and that's undeniably still a cause for concern, combined with no lengthening in the average hourly workweek and falling participation rate.
 
Long-duration bonds aren't buying it so far, although admittedly the headline number may still be enough to push more money into equities. This is one of the more unusual junctures, given various areas of the investable landscape that have behaved as if a correction has been under way at the same time broad large-cap indices have held on strong. Treasuries further out on the curve have strongly outperformed. As noted in "An Intermarket Approach to Tactical Risk Rotation," the third-place-winning Wagner Award paper that I coauthored, when Treasuries do well, you tend to have higher volatility in stocks after strength has occurred. Of course, this isn't a guarantee, but the odds do increase.
 
In a honey-badger stock market, though, nothing matters. Perhaps the "overbought" nature of defensive sectors and Treasuries is about to be undone, and in the very near term provide an opportunity for stocks to try for another leg higher. The most bullish sign out there is a minor pickup in inflation expectations, which Treasury inflation-protected securities (TIPS) can help get a sense of. Take a look below at the price ratio of the iShares Barclays TIPS Bond Fund ETF (NYSEARCA:TIP) relative to the PIMCO 7-15 Year US Treasury Index Fund (NYSEARCA:TENZ). As a reminder, a rising price ratio means the numerator/TIP is outperforming (up more/down less the denominator/TENZ).


Click to enlarge

If this trend continues, investor sentiment would likely continue to be supportive of risk-taking; however, the above has had many fits and starts in the past. Inflation expectations matter because they tend to be the conditions under which investors favor stocks versus bonds. Last year was a notable exception given very real deflationary behavior, but historical intermarket relationships appear to be normalizing. 
 
Strong payrolls? Check. Wage growth? Nope. Reflation? Remains to be seen.

Twitter: @pensionpartners
< Previous
  • 1
Next >
No positions in stocks mentioned.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

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