A surprise surge in inflation in Japan could be a sign of a major shift coming in the US economy, according to Societe Generale’s notoriously bearish strategist Albert Edwards.
Writing to clients on Tuesday, Edwards argues that Western economists tend to have too narrow a worldview when it comes to economic data and should pay more attention to the Japanese economy. That’s particularly true right now, thanks to a major shock in recent inflation numbers coming out of the world’s third-largest economy.
“Japan just reported a surprise surge in wage inflation to the fastest pace in two decades! Cash earnings (including overtime payments) surged to 2.1% yoy, twice what the market expected and the previous months pace of growth,” Edwards wrote in his Global Strategy Weekly note.
A chart of that increase can be seen below:
That surprise, while not widely discussed in the USA or Europe, could be a major indicator of what’s to come elsewhere in the world, particularly in the US.
“Japan remains a trail-blazer for the west on its own predictable journey along the same path to deflation, punctuated by brief glimpses of higher inflation as the cycle peaks,” Edwards said.
“Japan, once again, is showing the way – this time on wages. Persistent low wage inflation despite low unemployment might now be over.”
Edwards believes that what is happening in Japan could well happen in the USA in a few months time, with wages showing a surprisingly rapid jump compared to expectations. He points to the work of Jessica Rabe, the cofounder of market data firm DataTrek Research, who believes this prognosis and expects a surge in wage growth.
Rabe looks to what she calls the “Take your job and shove it” indicator, which measures the proportion of people voluntarily leaving their jobs, compared to being fired or removed. That indicator reached a record high of 63.2% in March, Rabe says. This essentially means that workers are confident enough in the economy to quite their existing jobs and go out in search of a new one.
As Rabe puts it: “This shows a greater belief among workers in their own ability to attain a more lucrative position and that the economy is strong enough to offer better jobs.”
That, combined with the fact that the number of job openings in the USA is growing, despite near historically low unemployment, points to surging wages in the near future.
“And if as we think,” Edwards concludes, “Japan is indeed leading the way, investors should be prepared for a sudden jump in US average hourly earnings.
“The market consequences could be immense. The dog that didn’t bark may be about to bite.”
Edwards doesn’t expand on what he believes those consequences may be but generally speaking stocks tend to fall when wages rise as investors start to worry about central bank’s raising interest rates.
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