The Australian market seemed to be a bit desperate looking for excuses for its broad falls yesterday, some folks blaming fears of a US slowdown which in turn would hurt the Chinese economy which would mean lower commodity exports.

Everything is possible of course, but it’s hard to think such a thing is about to happen just yet – particularly when real wages in the US have just taken off leading to a surge in consumer sentiment.

The wage rises though aren’t much in nominal terms, but come about thanks to the fall in the CPI as oil prices retreat and Detroit slashes the prices of gas guzzlers it can’t sell.

As he regularly does, Macquarie Bank international economist Mark Tierney cuts through some of the usual market noise to point to the importance of the underlying figures. His letter to clients this morning summarises what counts in the overnight inflation figures thus:

  • The US CPI for October showed that inflationary pressures have eased slightly. So markets were happy enough to assume that this lessened the chance of another tightening of monetary policy.
  • But the really important conclusion was quite different. Plunging headline inflation has boosted real wages significantly. In just two months, all the real wage losses of the past three years have been wiped. The growth rate of real hourly and real weekly earnings have exploded.
  • No wonder consumer confidence has taken off. Despite the hit from the housing slump, household budgets are in the best shape for years.
  • This is extremely important. It is completely different to the trends that took hold prior to the last recession. At that time, real income growth was on the skids. This time, it is booming.
  • At the same time, there is some evidence that the low point for housing is close. The NAHB survey of homebuilders improved for the second month in a row.
  • History says that turning points in this survey are usually close to turning points for the broader economy. In other words, the US economy is landing right now and this is about as bad as it gets.
  • If this is correct, it would be great news.

He is an economist, hence the “if this is correct” qualifier at the tail, but it makes yesterday’s local market excuses appear particularly threadbare.

Peter Fray

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