We’re On the Cusp Of Inflation Beginning

Gluskin Sheff Chief Economist David Rosenberg is bucking the bearish trend on Wall Street and running with the bulls instead, touting positive jobs and wages data as a sign that inflation—the current gold standard for economic recovery—may be right around the corner…

[The original article, as posted on Valuewalk.com and written by Michelle Jones, is presented below by the editorial team of  munKNEE.com (Your Key to Making Money!) in a slightly edited ([ ]) and abridged (…) format to provide you with a fast and easy read.]

…The debate continues about whether the Federal Reserve can and will trigger inflation (indeed, past history suggests that central banks have little to do with what happens in their economies despite their best efforts). This week’s rally across the board suggests that perhaps investors are beginning to believe that the world’s economies are finally finding some stability, probably because of this week’s positive U.S. economic data.

U.S. stocks soared to a two-month high this week, with the S&P 500 passing 2,000 again as it looks on track to end the week above this key support level. Emerging market equities are back from the dead on the back of a multi-day rally, and Asia saw another rally this week, as well, but will this rally continue, or is it going to be short-lived?

Wage pressures point to inflation coming

Gluskin Sheff Chief Economist David Rosenberg is bucking the bearish trend on Wall Street and running with the bulls instead, touting positive jobs and wages data as a sign that inflation—the current gold standard for economic recovery—may be right around the corner, noting that:

• the Fed’s latest Beige Book indicates that wage pressures are escalating, which of course is good news for the economy and that
• oil prices might also be on the path to recovery as investors have been rewarding major oil giants for cutting their capital expenditures plans for this year.

Looking for positives for equities

It does seem as if investors have finally gotten the memo about the U.S. economic data. Rosenberg has been saying for weeks that the tides are turning, and he reports that:

• the Investors Intelligence survey finally reads more bullish than bearish with 36.4% bulls and 34.3% bears.
  • The bullish side has grown almost 12 points from the February trough, while the bear side has fallen five points over the last three weeks.
  • Additionally, this is the first time since the beginning of the year that there are more bulls than bears, which eliminates part of the problem for equities.

Rosenberg also noted, while one positive for equities would be for the earnings revision cycle to change, that:

• Wall Street is, unfortunately, increasingly pessimistic as the earnings revision cycle for the S&P 500 fell again last month, marking the sixth consecutive decline and the lowest level since April 2009.
• On the plus side, though, is that 2009 marked the bottom of the earnings revision cycle, which could mean we are ripe for recovery in this area soon.
• He adds that analyst upgrades haven’t exceeded downgrades in more than a year.

More signs that inflation may be imminent

Rosenberg also noted several more positive economic data points:

• the higher-than-expected private sector employment, which grew 214,000 last month. Services added 208,000 jobs.
• The payrolls data wasn’t out when he wrote his note on Thursday morning, but since then we learned that they climbed 242,000, beating Bloomberg’s estimate of 195,000, although one negative indicator was the drop in wages.
• Unemployment remained at an eight-year low of 4.9%, according to government projections.

The final piece of the puzzle to spurring inflation is wages, and today’s report indicates that there’s more work to be done. However, Rosenberg also noted that:

• the number of people who quit their job voluntarily to take a better-paying one somewhere else has climbed 328,000.

In other words, wages are sure to rise because in order to keep workers, employers will have to pay more to retain them. It’s possible that the wage data will be revised upward, but if it isn’t, we could begin to see wage increases rise soon.

“My friends – the recruiting business is booming right now,” Rosenberg wrote on Thursday morning. “Companies are scrambling for talent… Wages for lower-skilled jobs are in a visible up trend, reinforced by hikes in the minimum wage, but make no mistake – there is a domino effect taking hold up the pay scale.”

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