Investors should consider recent US job data as a red flag under the country’s current ‘Goldilocks economy’ conditions, according to financial advisory organisation deVere Group.
While current US economic conditions could be described as “not too hot and not too cold, but just about right”, deVere Group chief executive Nigel Green warned that July job data “suggests inflation could now become an issue in the near term”.
The July data was “strong across the board”, but the increase in hours worked and in wages “will impact headline CPI”, Mr Green cautioned.
“The Federal Reserve will be conscious that though CPI for July came in at just 1 per cent year on year, further wage increases could lead to the target level of 2 per cent being breached quite quickly if Americans come to expect higher wages as a matter of course,” he said.
The Fed is likely then to raise interest rates in a bid to cool the labour market and “avoid exceeding inflation targets”, Mr Green said.
“With wage growth expectations now likely to pick up, the Goldilocks scenario now looks to be coming to an end, with inflation becoming a real concern, meaning a rate hike is increasingly likely," he said.
“With the Federal Reserve being the world’s de facto central bank, a raising of US rates will have important ramifications for investors, not only in the US but the world over."
Mr Green added that investors should take prompt action to minimise the risk that a rate hike could pose to their portfolios.
“Investors should be seeking a safe haven from the likely turbulence caused by a forthcoming rate hike by having an appropriately balanced portfolio. This includes adequate diversification across asset classes, sectors and regions,” he said.
Economists agree that the Reserve Bank is likely to remain in inflation fighting mode until December. ...