Ask the current CEO of soccer (football) club Paris-Saint Germain about labor costs and he will undoubtedly say expensive. His star footballer, Leo Messi, who recently guided Argentina to a World Cup victory, verbally agreed to extend his current 8-figure contract. Similar dialogs, albeit of substantially lower quantities, are occurring throughout the U.S. and Europe. Despite rising wages and/or benefits, labor protests and union strikes continue at an increasing pace – as displayed by the UK schedule of nine major groups striking over the month. The results and financial impact of these discussions, coupled with other economic, social, and political crosscurrents, represent forecasting challenges for Main Street, Wall Street, and the Fed regarding future economic and asset performance.
As 2022 ends (and what a year it has been!), markets and central bankers may agree the worst is behind us, with equities experiencing the worst drop since 2008 and the U.S. Aggregate bond index marking the largest annual loss since its 1979 inception. However, the agreement may end here as some market participants and the Fed appear to read the tea leaves differently. The U.S. inflation picture, improved slightly, sparking a late 2022 risk rally in credit and equity markets. Although the Fed slowed the pace of rate hikes to 50 basis points (bps) in December, it remains unconvinced that the improvement is thorough enough to significantly alter policy course. The central bank views the labor market as out of balance, potentially threatening its 2% inflation mandate.
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