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On the Nikkei’s Ascent, Europe’s Energy Crisis & Great US Earnings
Japan’s Nikkei index has soared to a record high in defiance of economic reality. Stagflation looms, and the government has no economic rescue plan. William discusses the reasons for the decoupling of the stock market from economic fundamentals and shares measures the prime minister could take to keep the bulls running. … Also: The closure of the Strait of Hormuz puts European economies in harm’s way. Melissa examines the Eurozone’s exposure to energy imports from the Middle East and the stagflationary implications of the energy-supply shock. … And: Joe reports cheery stats from the 30% of S&P 500 companies that have reported Q1 earnings so far.
Powell's Swan Song
Tomorrow at 2:30 p.m., Jerome Powell will sing his swan song. That will be his last press conference after the latest FOMC meeting. The Senate Banking Committee is scheduled to confirm the nomination of Kevin Warsh to replace Powell tomorrow. The Senate could move to a final vote shortly thereafter. Powell will likely explain why the FOMC is unlikely to lower the federal funds rate any time soon. Warsh has been calling on the Fed to do so as soon as possible. Powell will stress that inflation risks have increased, while unemployment risks have decreased. On the inflation front, peace talks between the US and Iran have hit an impasse, causing Brent to surge back above $100 per barrel on Tuesday, with WTI crude close behind (chart). The longer negotiations remain stalled, the higher oil prices could go. The key question is whether persistently high, or even higher, oil prices will bleed into underlying inflation? The answer will largely depend on whether the current energy shock triggers a wage-price spiral as it did in 2022 when oil prices spiked after Russia invaded Ukraine (chart). The inflationary spiral was exacerbated by global supply chain disruptions and very stimulative fiscal and monetary policies. Will it be different this time? We think so. For starters, global supply chain disruptions are likely to be less severe this time despite the blockade of the Strait of Hormuz (chart). Before the war, 80%-85% of the oil that passed through the Strait was going to Asian markets, with India and China together accounting for 52% of the oil sourced from the Arabian Gulf. They are both getting more oil from Russia now. Labor demand greatly exceeded labor supply during the pandemic years, even as supply increased (chart). Over the past year or so, the labor supply has stopped growing, but so has the demand for labor, and they are in balance. So there is less upward pressure on wages currently than there was a few years ago. That balance, however, may not hold. Several data points suggest that demand for labor is beginning to pick up, while the supply remains constrained. This might lead to higher wage gains, but we think that won't be inflationary because the gains will be supported by productivity growth. Consider the following: (1) Consumer confidence. The Conference Board's April Consumer Confidence Index survey showed that 80.2% of respondents agreed that jobs were either available or plentiful (chart). The 19.8% saying that jobs are hard to get is a relatively low reading. (2) ADP weekly job growth. For the four weeks ending April 11, private employers added an average of nearly 40,000 jobs per week (chart). That's the third consecutive weekly reading around that pace, and well above January, February, and early March readings. (3) Job postings. It is widely assumed that AI-driven productivity gains will structurally reduce demand for labor. The opposite is more likely, in our opinion. Productivity increases the value of workers, especially when the supply of workers is constrained as it is now. Wages rise faster than prices when productivity is growing. More productive workers tend to find jobs. Case in point: INDEED job postings for software developers are rising, not falling, as AI increases the demand for workers who know how to prompt and manage AI models (chart). Overall job postings have been rising since the second half of 2025. (4) Business formation. Applications to start new businesses are also climbing to record highs, as AI lowers the barriers to entrepreneurship (chart). More businesses mean more demand for workers. (5) Constrained labor supply. While demand for labor is picking up, the supply side faces headwinds that show no sign of abating. Baby Boomers may be retiring at a faster pace than new entrants to the labor force are entering it(chart). Restrictive immigration policies are compounding this dynamic by limiting inflows of foreign labor (chart). (6) Wages. The combination of rising demand and constrained supply is beginning to show up in wages. Wage growth for job-switchers has recently moved higher, which is a leading indicator of broader labor market tightening, as workers typically only switch jobs for better pay (chart). (7) Regional Fed business surveys. The average of the regional Fed manufacturing surveys moved further into expansionary territory during April and is at its highest reading since late 2022 (chart). This augurs for a solid reading of April's national M-PMI.
Eurozone Facing Tough Times Again
The European Central Bank faces a tough decision when it meets this week. Tightening to tamp down rising inflation from the energy shock of the Middle East war is riskier now that the recent PMI release indicates contraction, William explains. The unexpected weakness brings the specter of stagflation, squelching the economic optimism that prevailed prior to the war. … Also: The German economy, the Eurozone’s anchor, hasn’t been this weak since the Covid period. Officials warn of long-term pain. … And Toby traces the Europe MSCI’s comparatively poor earnings and productivity growth to Europe’s lack of AI powerhouses and other technology innovators, with the exception of ASML and SAP.
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