- The Wages of Fear. “When you can be blown up at any moment, only a fool believes that character determines fate.” While that might sound like an apt description of today’s credit markets, it was film critic Pauline Kael’s description of the source of this month’s title, “Le salaire de la peur,” a 1953 thriller starring Yves Montand. Fear returned to financial markets in July following a long stretch of financial complacency highlighted by historically low levels of volatility. Many policy makers had been warning of such concerns, and one market—high yield—that caught the attention of the Fed saw significant declines at the end of July.
- Fear of Wages. The Fed increasingly relies on a lack of wage inflation to validate its persistent zero-interest-rate policy. Wage inflation measures clearly show this lack of inflation justifying even more dovish expectations surrounding the Fed’s policy in the bond markets. However, forward-looking wage measures show clear indications of future acceleration. We expect those to eventually show up in wage inflation, challenging the market’s complacency on rising rates, particularly in the front end. The Jackson Hole symposium on labor markets will be a key focus.
- Has the Fed become more dovish or hawkish? Both. That appears to be the confusing takeaway from recent Fed communications. Along with the recent slate of economic data, Fed statements have contributed to rising market uncertainty. Such an outcome is bad for financial asset performance and represents another potential catalyst behind recent increases in financial-market risk.