Along with my trades for 2018, there are some charts that I believe will be key for determining how the year unfolds.
First, wages are a key metric of the monthly NFP, perhaps as closely watched as the headline number. As I’ve mentioned before AHE is led by the Atlanta Fed’s Wage Growth Tracker. There’s been a slight pullback in the momentum of AHE, and my view is that the WGT will stay at or above its growth rate and that AHE will move upward toward it as it did in the previous cycle (the 90s play out this way as well, as is illustrated by a longer time series).
If this occurs the Fed will be forced to turn more hawkish and the front end will move up more quickly than what’s priced in.
What makes me think wages will move up? That takes us to our next chart:
Housing starts. As not-esteemed-enough professor Edward E. Leamer notes “Housing IS the Business Cycle”. Only two post-war recessions were not precipitated by a housing decline–the dotcom bust and the DOD recession in 1953. As long as starts keep on trucking, the music will keep playing.
The yield curve.
A fairly reliable recession predictor, though usually several years out, I think it’s likely the curve inverts this year. I’ll have follow-up posts on the two and the ten separately and suffice it to say that flattening will solidify the regime in which we find ourselves, and set up trades for next year. And although Yellen is out and Powell is in, I have a feeling her view that yield curve inversion isn’t a harbinger is consensus within the Fed, which means they’re not likely to fight it.
Above is the Caixin PMI. If this stays above 50 expect commodity currencies, copper, global DM equities to continue to rally. Expect the opposite if there’s a move below 50. Which way is it going to go? I have no idea. The size and complexity of China coupled with the dearth of quality data and opacity of their credit markets make it a trade for none but a few true experts, and none of them is writing this blog post.