Quick Takes from the Financial News: USMCA, Amazon, Powell’s Speech

Posted by Brad McMillan, CFA, CAIA, MAI

This entry was posted on Oct 3, 2018 3:45:40 PM

and tagged In the News

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financial newsThere’s a lot going on in the world. As such, I thought today would be best served by taking a quick look at some of the financial news—and what the headlines mean in the bigger picture.

USMCA

The U.S.-Mexico-Canada Agreement (USMCA) has been announced and will now need to be approved by the respective governments. It is being presented as a major upgrade to NAFTA—one that solves critical problems (from a U.S. point of view) while not really changing much at all (from a Mexican and Canadian point of view). Both views have merit. It does make the previous agreement more fair and even more beneficial to the U.S. while preserving the interests of Mexican and Canadian (and U.S.!) companies in being able to operate and sell across North America. While far from revolutionary, to call it evolutionary is reasonable.

More important than the details of the agreement, however, is the fact that it got done at all. One of the market’s major concerns has been whether the rising trade conflicts were inevitably going to get worse or whether Trump’s tactics would work and get a better deal. The USMCA proves that deals are possible under these conditions. Apart from the immediate relief of the USMCA, this agreement reduces fears about other deals under negotiation. Overall, the result is a win for the U.S. and the Trump administration.

Amazon raises minimum wage to $15 per hour

This story has been spun as a come-to-Jesus moment for social responsibility, not least by Bernie Sanders. But I see it as another indicator of the strength of the labor market and the need by employers, especially the largest, to stay competitive in order to attract the people they want. A couple of years ago, we saw this same effect with Walmart, Target, and McDonald’s. Now the poster child for the new economy is facing the same problem, and Amazon is being forced to raise the bar even further on pay.

One of the key worries for the economy as a whole is when and whether inflation will pick up substantially. Wage growth is a key part of that equation, and it has lagged behind historic levels for years. Now, though, we see a clear uptrend. The fact that Amazon is being forced—and make no mistake, this is not altruism—to raise pay shows that the labor market may well have finally reached the tipping point. This brings us to the final hit.

Fed Chair Powell: U.S. economy is not “too good to be true”

In a speech yesterday, Powell described the economy as “remarkably positive.” He explained his thoughts on how, despite the fact that the current combination of low unemployment and low inflation is pretty much unprecedented, it can nevertheless continue for several years, primarily because the Fed now knows more about how to manage the economy. He may be right. To his credit, he also spent quite a bit of time talking about the risks and how the forecasts could go wrong.

To me, though, much of his argument boils down to “things are different this time” and “we know better this time.” We last heard these arguments from the chair of the Fed in 2007, after a similarly long run of good economic news and just prior to the last crisis. With signs of rising wage inflation such as Amazon, on top of the recent trend shift to faster wage growth, I am not nearly as sure as Chair Powell that we can continue to have low unemployment without higher inflation.

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