Hourly Earnings Growth - Real Wage Growth Is Positive Again

Inflation missed estimates as CPI fell from 2.9% year over year to 2.7%. Hourly earnings growth was 2.9% which was a cycle high. Therefore, it’s not surprising real wage growth switched from negative to positive in August.

As you can see from the chart below, real hourly earnings growth went from -0.1% to 0.2%. I think real earnings growth will continue. Inflation is going to start facing tougher comparisons. The labor market is getting close to being full, and productivity growth is accelerating.

Year over year weekly earnings growth went from 0.1% in July to 0.5% in August. As you can see, production and non-supervisory workers saw hourly earnings growth improve from -0.3% to -0.1%.

Their weekly earnings improvement was the best out of these 4 categories as it went from -0.1% to 0.5%. Improvement to real earnings growth is a great signal for real consumption growth which drives GDP.

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Hourly Earnings Growth - Pot Stock Soars

The top story on Wall Street was the volatile action in the marijuana stock Tilray which had 30 million shares traded on Wednesday. As you can see from the chart below, the stock increased 93%, fell 49%, and then increased 45% all in one day.

This small Canadian cannabis firm had a wild ride partially because it has a small float as there are only 17.8 million shares available. The stock had its IPO at $17 in July and peaked at $300 on Thursday.

This parabolic action has little to do with the fundamentals of the firm. It’s worth discussing if the bull market is near its end because of this wild speculation. This is similar to the meteoric rise of bitcoin and altcoins. They have since cratered as the total market cap for all cryptocurrencies is only $200 billion; it peaked at $835 billion on January 7th.

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Hourly Earnings Growth - Major Indexes Mixed

The major indexes were mixed as the Dow increased 0.61% and the S&P 500 increased 0.13%, while the Nasdaq fell 8 basis points and the Russell 2000 fell 0.47%.

Even though the S&P 500 was up, the CNN Fear and Greed index fell from 73 to 71, which still signals greed. The financials had a great day as Goldman Sachs increased 2.9%, JP Morgan increased 2.9%, and Citigroup increased 3.3%.

Financials and the materials were the best sectors as they were up 1.76% and 1.12%. The worst sectors were utilities and telecom which fell 2.12% and 1.35%.

Hourly Earnings Growth - 10 Year Yield Stays Above 3%

These performances occurred because rates have been rising. The banks love when rates rise and the curve steepens, while telecom and utilities hate rising rates because high bond yields compete with their dividend yields.

The 10 year yield is now at 3.06% and the 2 year yield is at 2.79%. The 10 year yield is 5 basis points away from its cycle high. On August 27th, the difference between the 10 year and 2 year yield was 18 basis points. It’s now 27 basis points which means the curve steepened 9 basis points in about 3 weeks.

This like when the difference increased from 24 basis points on July 17th to 33 basis points on August 1st. The 10 year breakeven inflation rate is only 2.13%, meaning the increase is coming from optimism about future growth.

Hourly Earnings Growth - Assessments Of Trade War

There wasn’t any news on the trade war front, but we received updated forecasts from the banks. Bank of America Merrill Lynch said the trade war would hurt China more than America because it exports 4 times more goods to America than it imports.

Specifically, America exported $187.5 billion worth of goods to China in 2017 and imported $522.9 billion in Chinese goods. China’s $60 billion in goods tariffed and its previously announced $50 billion in tariffs don’t total all the goods it imports. However, it can’t tax $250 billion goods like America is doing.

I expected China to match America’s threat by taxing all its goods and at a higher rate to make up for the difference in total goods, but that didn’t happen as China is taxing them at a lower rate which is between 5% and 10%.

Specifically, Bank of America expects Chinese 2019 GDP growth to be only 6.1% even though growth should be helped by the Chinese stimulus. JP Morgan expects 2019 GDP growth to be hurt by 0.6% because of this trade war.

Bank of America expects current tariffs to hurt American GDP growth by between 0.1% and 0.2%. If the tariffs are raised to 25% like Trump promised and China retaliates, the bank expects growth to be hurt by between 0.2% and 0.3%.

Hourly Earnings Growth - Even with that impact, Bank of America expects U.S. GDP growth to be 2.7% in 2019.

The big worry the media is promoting is that China could sell their U.S. treasuries as a part of the trade war. As you can see in the chart below, Chinese ownership of U.S. treasuries is at a 6 month low.

However, this a chart crime because the y axis starts at $1.165 trillion which makes it look like there has been sharp movement in their holdings, but it has been small. It’s illogical that China would issue such low tariffs as retaliation and then start selling U.S. treasuries.

It’s wrong to act as if China can easily stop buying treasuries. Clearly, China likes the yield and stability treasuries provide. It would take an all out trade war or maybe even a real war for China to stop buying American treasuries.

I’m not saying the trade war won’t hurt the economy. I’m saying we’re not close to the point where China would sell treasuries because that’s a huge weapon. Both countries still need each other which means hurting the counterpart would hurt itself.

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Hourly Earnings Growth - Conclusion

I am uncertain if the bubbles in cryptocurrencies and pot stocks are signals the bull market is near its end.

They are too small to cause a problem in the economy, but it is disconcerting to see billions in capital chasing around assets trading way above their fair value.