It is all about lags and the wage inflation spiral It is all about lags and the wage inflation spiral It is all about lags and the wage inflation spiral

It is all about lags and the wage inflation spiral

Equities 3 minutes to read
Peter Garnry

Chief Investment Strategist

Summary:  Jackson Hole turned out to be a non-event for markets with the Fed keeping all options open. However, Powell did touch on two important topics of assessing lags of monetary policy into the economy and the stronger link observed in wage dynamics and inflation. These two topics mean that risks to the monetary policy path are still high and warrant higher for longer to avoid the mistakes made in the 1970s. We maintain our defensive view on equities which means that we are still overweight energy, utilities, health care, and consumer staples.

Key points in this equity note

  • Jackson Hole was a non-event judging from market reactions across equities and bond yields. Monetary policy risks are still tied to unpredictability in assessing the proper lags in monetary policy and the recently stronger link between wage dynamics and inflation.

  • We maintain our defensive view on equities presented in our recent stagflation light call which means that we remain overweight defensive sectors such as energy, consumer staples, health care, and utilities.

Lags and spirals

Fed Chair Powell’s speech on Friday did not rock the boat with markets remaining calm. The short summary is that the Fed is keeping all options on the table, but as the market is correctly trying to price the Fed is getting more explicit that one more rate hike is still on the table. Inside the boring delivering there were two sections that caught our attention. The first was the mentioning about lags from which monetary policy starts working and that those were both time-varying, conditional on the inflation regime, and thus very difficult to assess. This induces considerable risks to monetary policy and the Fed is keen on avoiding the 1970s mistake in which the Fed eased the policy rate to quickly as inflation cooled creating the foundation for the second wage of inflation during the late 1970s.

The second interesting topic that Powell briefly touched at the very end of his speech was the observation that the link between wage dynamics and inflation had strengthened in a way that had not been seen in many decades. This is the Phillips curve echo from the 1970s in which the economy enters a wage inflation spiral. This is the ultimate fear of central banks because it means inflation has moved from ordinary demand supply dynamics and the goods economy to something that is more engrained in our expectations and thus suddenly because a social perception dynamics which is far more difficult for the central bank to crush.

The Fed’s favoured measure of tight labour markets is the number of job openings to the number of unemployed people in the economy. This measure is still showing that there are 1.6 job openings for every unemployed person. In other words, any negative impact from higher interest rates in certain parts of the economy will be absorbed in other less interest rate sensitive parts of the economy offsetting the objective the current monetary policy and extending the lag in the monetary policy transmission. Powell also said that nominal wages add to come back to levels consistent with the 2% inflation target which is roughly nominal wage growth of around 3.5% squaring real wages with estimated long-term productivity gains. The median wage growth in the US economy was 5.7% as of July.

Maintain defensive view on equities

Based on the fact that Jackson Hole was a non-event we maintain our stagflation light call on equities and thus overweight defensive sectors vs cyclical sectors. This means that we are still in favour of health care, energy, utilities, and consumer staples. The list below highlights the top largest companies in each sector for the US and European equity markets respectively.

Largest US defensive stocks

  • Eli Lilly (Health care)
  • UnitedHealth Group (Health care)
  • Exxon Mobil (Energy)
  • Chevron (Energy)
  • Walmart (Consumer staples)
  • Procter & Gamble (Consumer staples)
  • NextEra Energy (Utilities)
  • Southern (Utilities)

Largest European defensive stocks

  • Novo Nordisk (Health care)
  • Roche (Health care)
  • Shell (Energy)
  • TotalEnergies (Energy)
  • Nestle (Consumer staples)
  • L’Oreal (Consumer staples)
  • Iberdrola (Utilities)
  • Enel (Utilities)

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article


The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (
- Full disclaimer (

40 Bank Street, 26th floor
E14 5DA
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo is a registered Trading Name of Saxo Capital Markets UK Ltd (‘Saxo’). Saxo is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992