![\"figure_1_-_growth_of_us_payrolls_has_lagged_far_behind_the_growth_of_the_working-age_population_since.png\"](\"http:\/\/beta.next-finance.net\/wp-content\/uploads\/2015\/01\/figure_1_-_growth_of_us_payrolls_has_lagged_far_behind_the_growth_of_the_working-age_population_since.png\")
<\/p>\nForemost is the implementation of labor market reforms that enhance the mobility and wage flexibility of
\nEurozone workers. <\/p>\n
Early on such reforms should restrain the growth of European wages. And that will reduce the risk of a flare-up
\nof Eurozone inflation despite the more stimulatory monetary policy and cheaper euro exchange rate. <\/p>\n
The likely combination of slower wage growth throughout the rest of the world and the US\u2019s loss of
\ncompetitiveness to a costlier dollar exchange rate will help to curb US wage growth. A recent consensus
\nforecast calls for an acceleration by the year-to-year increase of the average hourly wage from December
\n2014\u2019s 1.7% to 2.7% by December 2015, where the latter would still fall short of the 3% to 4% range that was
\ncommon to the mature phase of previous economic recoveries.<\/p>\n
However, the anecdotal evidence suggests that the average wage of year-end 2015 will grow at a pace that is
\ncloser to 2.0% than to 3.0%. Indications are that financially strong companies having healthy earnings growth
\nare adhering to 2% wage hikes for 2015. Thus, businesses with average prospects are not likely to increase
\nwages by more than 2% annually.<\/p>\n
As inferred from December 2014\u2019s 1.6% annual rate of core CPI inflation, 2015\u2019s annual increase by average
\nhourly earnings is likely to be in a range of 1.75% to 2%. Moreover, it\u2019s difficult to imagine why businesses
\nwould offer wage hikes in excess of 2% annually, on average, given modest prospects for core profits amid a
\nstill slack labor market.<\/p>\n
Despite how December 2014\u2019s payrolls were up by 2.0 million jobs from their previous cycle peak of January
\n2008, such employment growth approximated just 25% of the accompanying 8.1 million person increase in
\nthe number of Americans aged 16- to 64-years. In turn, the ratio of payrolls to the Labor Department\u2019s
\nestimate of the working age population fell from January 2008\u2019s 59.5% to December 2014\u2019s 56.4%. (Figure 1.)<\/p>\n
<\/p>\n
Regarding profitability, Bloomberg\u2019s latest consensus predicts the operating income of the S&P 500\u2019s member
\ncompanies will rise by less than 2% annually, on average, during 2015\u2019s first three quarters, which is much
\nslower than yearlong 2014\u2019s prospective gain of 6.5%. The containment of wage growth will limit the upside for the US short- and long-term interest rates. According to a recent interest-rate futures contract, the federal
\nfunds rate may be no greater than 0.5% by the end of 2015. <\/p>\n
A limited upside for the federal funds rate, which may rise no greater than 2.5% during the next tightening
\ncycle, and the exceptionally low government bond yields of other advanced economies ought to rein in US
\nTreasury bond yields. In terms of 10-year sovereign government bond yields, the recent 1.87% of the US
\nTreasury looks generous compared to Japan\u2019s 0.30%, Germany\u2019s 0.45%, France\u2019s 0.62%, the 1.41% of Canada
\nand Spain, as well as Italy\u2019s 1.56%. Expectations of a further appreciation by the dollar exchange rate would
\nenhance the relative attractiveness of US Treasury bonds. (Figure 2.)<\/p>\n
![\"figure_2_-_ten-year_government_bond_yields_-_us_treasury_s_recent_1.87_looks_ample_compared.png\"](\"http:\/\/beta.next-finance.net\/wp-content\/uploads\/2015\/01\/figure_2_-_ten-year_government_bond_yields_-_us_treasury_s_recent_1.87_looks_ample_compared.png\")
<\/p>\n
However, worry over how the stronger dollar and the current worldwide underutilization of productive
\nresources might put unwanted downward pressure on US product prices has widened the yield spreads of US
\ncorporate bonds, notwithstanding expectations of a climb by US real GDP growth from 2014\u2019s prospective
\n2.4% to 2015\u2019s projected 3.2%. The spread widening of the past 12 months has been most pronounced for
\nthose industries suffering direct hits from price deflation. For example, the 161 bp widening by Credit Suisse\u2019s
\nUS high yield bond spread of the last 12 months has been dominated by the swellings of 464 bp for high yield
\nenergy companies and the 327 bp for the metals\/minerals group.<\/p>\n
Nevertheless, even the high yield bond spreads of industries that are likely to benefit from sharply lower
\nenergy prices have widened over the past year. In terms of the broadening of spreads since late January 2014,
\nthese industries include the 56 bp of airlines, the 77 bp of autos, the 113 bp of residential real estate
\ndevelopment, the 140 bp of building materials, and the 146 bp of retailing. Apparently, markets fret over a
\npossible fanning out of softer prices that might adversely affect systemic liquidity, in general. <\/p>\n
However, if quantitative easing by the ECB succeeds at steadying the outlook for Eurozone price inflation, high
\nyield bond spreads might benefit globally. In response to the Federal Reserve\u2019s recent application of QE3, the
\nUS high yield bond spread\u2019s month-long average narrowed from June 2012\u2019s 679 bp to the current upturn\u2019s
\n331 bp bottom of June 2014. Following October 2014\u2019s expiry of QE3, the high-yield bond spread
\nsubsequently widened to a recent 536 bp. Yet, the surge by US equity prices in immediate response to the
\nECB\u2019s policy move portends a renewed narrowing by the US high-yield bond spread.<\/p>\n
How US corporate bond spreads fare during the ECB\u2019s ongoing application of QE may influence the timing of
\nthe Fed\u2019s next rate hike. For example, the last two starts to extended series of Fed rate hikes (February 1994
\nand June 2004) occurred in the context of high-yield spreads of less than 400 bp. Thus, a hiking of fed funds is
\nmore likely if quantitative easing by the ECB helps to narrow the US\u2019 high-yield bond spread. (Figure 3.)<\/p>\n
Quantitative easings by the Federal Reserve did more than abet narrowings by the high yield bond spread, they
\nalso helped to lower the VIX index. Thus, at a minimum, the amplification of ECB monetary stimulus implies
\nthat European share prices are likely to be higher than otherwise. (Figure 4)<\/p>\n
![\"figure_3_-_quantitative_easings_by_the_federal_reserve_facilitated_narrowings_by_the_high-yield_bond.png\"](\"http:\/\/beta.next-finance.net\/wp-content\/uploads\/2015\/01\/figure_3_-_quantitative_easings_by_the_federal_reserve_facilitated_narrowings_by_the_high-yield_bond.png\")
<\/p>\n
Thus far, the anticipation of the ECB\u2019s bond buying program has done more to lower the government bond
\nyields of the Eurozone\u2019s peripheral economies than to the yields of the group\u2019s core economies. For example,
\nin terms of 10-year government bond yields, Germany\u2019s recent 0.45% was up slightly from its record low, the
\nyields of 1.41% for Spain and 1.56% for Italy were new record lows. In turn, the government bond yield
\nspreads of Spain and Italy are now the thinnest vis-a-vis German bond yields since the Eurozone crisis emerged
\nin 2010. <\/p>\n
Though quantitative easing tends to narrow the bond yield spreads of riskier borrowers, it does not assure
\nlower bond yields for the \u201crisk-free\u201d benchmarks. For example, the 10-year US Treasury yield\u2019s month-long
\naverage bottomed before the unveiling of QE3 in July 2012 at 1.50% and would average 1.81% during the first
\nsix months of the Fed\u2019s latest episode of bond purchases. If the market believes in the efficacy of the ECB\u2019s
\nquantitative easing, the 10-year German government bond yield may have already set its low for the current
\ncycle. If that proves true, US Treasury yields are all the more likely to rise. (Figure 5.)<\/p>\n
![\"figure_5_-_government_bond_yields_can_rise_amid_quantitative_easing_._10-year_us_treasury_yield.png\"](\"http:\/\/beta.next-finance.net\/wp-content\/uploads\/2015\/01\/figure_5_-_government_bond_yields_can_rise_amid_quantitative_easing_._10-year_us_treasury_yield.png\")
<\/a>\n\t\t\t<\/div><\/figure>