Many Working Parts: Jobs, The Dollar, Wages, Inflation, Commodities, EM Debt And European Savings

September’s jobs report came out with a strong headline (i.e. 248,000 new jobs, 5.9% Unemployment) on top of arguably weak core components (i.e. declining labor force participation and wages).  “Over the course of 2014, the trend has risen from around 2.1 million net new jobs a year to 2.6 million as of September, the strongest since April 2006…But here’s the less rosy sign of the report.  The improving job market does not seem to be pulling people who left the labor force over the last few years back into it.”  Meanwhile, “even as unemployment slips below 6 percent, Federal Reserve policy makers have a reason to keep interest rates near zero: inflation is too low and wages aren’t growing…’If there are no wage gains, consumers are unlikely to increase the quantity of goods they buy, on net, and demand-pull inflation should remain pretty tame’…For the Fed, ‘what it means is that it gives you some cushion if you move too late — it reduces the risk of waiting too long.’”  Meanwhile, three factors may shed some light on why the American workforce/consumer has yet to see a pay raise: 1) “Economists note that wages are generally a ‘lagging’ indicator…’We may find out six months from now that 6 percent was the trigger point,’” 2) “As older, higher-paid baby boomers retire, they’re being replaced by younger workers who earn less,” and 3) “Since employers shouldered higher wages than they wanted to during the recession, they might be making up the difference by paying workers less during the recovery.”  Getting back to inflation for a minute, there’s another reason why inflation expectations have stalled out at ~1.5%: “If the dollar were to strengthen a lot, it would have consequences for growth…We would have poorer trade performance, less exports, more imports…it would tend to dampen inflation.  So it would make it harder to achieve our two objectives.  So obviously we would take that into account.’”  That’s New York Fed President William Dudley trying to put some brakes on a surging $US.  Speaking of which, “gold slumped to its lowest level in 15 months on Monday…the benign inflationary environment and rally in the U.S. dollar have dulled the appeal of the [precious] metal.”  Here’s something else to consider: “fund managers cannot sustain another underperformance of the S&P 500…they are selling precious metals and energy to buy the dips in momentum stocks.  Hence, the plunge in gold and silver and the weakness in crude oil.”  Meanwhile, a Morgan Stanley economist lays out the glass-half full story for global growth: “For starters, the US economy keeps humming along nicely…Second, the drop in oil prices is a boon for consumers around the globe.  Third, lower risk-free bond yields buy more time for EM deficit countries to reduce their external imbalances.  Fourth, a stronger dollar is exactly what the doctor ordered for the ailing European and Japanese economies.”  Meanwhile, “nonfinancial companies in emerging markets have been on a borrowing binge for the past five years…The financing required by emerging-markets companies to roll over their debts will rise from $90 billion in 2015 to $130 billion in 2017 — a period when the Federal Reserve is expected to be raising rates, making money scarcer.”  Meanwhile, “at around 400bn USD each year, Europe’s current account surplus (i.e. Euroglut) is bigger than China’s in the 2000s…Euroglut means that as the world’s biggest savers, Europeans will drive international capital flow trends for the rest of this decade.”  Furthermore, “the ECB plays a fundamental role here: by pushing down real yields and creating a domestic ‘asset shortage’, it is incentivizing European reach for yield abroad.’”