In recent times, financial markets have taken on the economic sanctions, stuttering supply chains, runaway inflation and rising borrowing costs, but continue to push on.

  • US unit labor cost growth in the second quarter exceeded 10% for the second consecutive quarter.
  • Westpac consumer confidence for the month of August is down 3%.
  • Key inflation data from the US and Europe will be out later today – what will it take to push the market out of this tight trading range?

High prices remain

U.S. unit labor costs for the second quarter of 2022 were 10.8% higher than the prior quarter on an annualized basis, and above 10% on this data point release for the second consecutive quarter.

Higher wages have hurt corporate profits, driving down net operating income and threatening their ability to hire and keep the economy moving.

A point in time

The Federal Reserve could raise rates in response to high wage inflation, increasing the costs of accessing debt and, therefore, a company’s cost of capital.

Capital funding rounds for expansion and hiring can be postponed, with only the most profitable opportunities being funded and a few of the most marginal being abandoned.

Slowing and even falling hiring is one of the predicted consequences of a policymaker’s rate hike. Although degenerative for the economy in the short term, it is designed to ensure that a nation’s population does not receive so much money that all prices rise unrelated and irreversibly harm the most vulnerable.

The future-oriented market

Financial markets anticipate events before they happen if the parameters have already been set. When economic data suggests wages are rising very rapidly relative to the past, a rise in the likelihood of higher interest rates than in the recent past will most likely be reflected in the markets.

When interest rates rise, unless inflation is too rapid for the policymaker to catch up, the most likely market reaction is for the currency to appreciate as cash savings become more profitable in relation to investment and expenses.

This may then be somewhat surprising because while we continue to see high labor cost prints, the US Dollar is actually trending sideways.

The six-month US dollar index chart

There are two possibilities here:

  1. We have peaked in the inflation cycle and may be turning the corner, leaving the door open for policymakers to start slowing rate hikes.
  2. The more worrisome of the two possibilities is that the US Federal Reserve is too far behind the curve and the US dollar is slipping accordingly, necessitating a more aggressive rate hike approach.

A soft landing in sight?

Data from around the world and the recent downward trajectory of the price of oil point to the first possibility playing out now.

China’s inflation print through July was released today by the National Bureau of Statistics. The zero COVID approach continues to have a positive impact on the back pocket of the population. Year-on-year inflation for July eased to a more manageable 4.2% from the 8% expected.

The National Australia Bank (NAB) Business Conditions Index for July has been hovering around highs since data began. Although not closely followed by the wider market as it is too narrow a view to reflect market movements, the print suggests companies will continue to hire in Australia.


The S&P/ASX 200 Index has moved sideways over the past two weeks, hampered by high inflation and rising borrowing costs, while experiencing strong employment and businesses benefiting from a cashed-in consumer.

If the global supply of raw materials and labor has entered a rebalancing cycle with prices moving to a more moderate stage of growth, then it is possible that international monetary policy makers will begin to consider slowing down. rate hikes and that more jobs can be protected.

It’s too early to tell which direction we’ll go, but there are signs that we may be able to get past this milestone without too much collateral damage and that the economy continues to hold its own for now.

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