Markets are premature in their optimism that wage inflation is fading, Barclays says

• Market optimism that wage growth pressures are diminishing is premature, Barclays Investment Bank said Wednesday.
• Recent US data suggest earnings growth slowed in December from downwardly revised figures in November.

Recent data showing slower wage growth has spurred anticipation of further easing in inflation, but the market may be too early in seeing earnings pressure as substantially cooling, Barclays said.

The S&P 500 has picked up about 4% since Friday after the Labor Department said, in part, growth in average private hourly earnings slowed to 4.6% on a year-over-year basis in December from a downwardly revised November rate of 4.8%. The monthly rate of 0.3% was smaller than 0.4% in November.

Federal Reserve policy makers have been highlighting the importance of slowing labor demand and wage growth as key factors in obtaining sustained declines in non-housing core inflation. With slowing wage data, investors may be preparing for the Fed to signal that it's getting nearer to the end of its rate-hike campaign or even setting its sights on rate cuts later this year.

But month-to-month average hourly earnings numbers "are notoriously noisy," Jonathan Millar, senior US economist at Barclays Investment Bank, said in a note published Wednesday.

"Although the market focus on wage pressures is appropriate, optimism that they are diminishing is premature, in our view," he wrote. "Broader labor market data, such as private nonfarm payrolls, the unemployment rate, job openings, the quit rate, and initial jobless claims all remain consistent with a tight labor market," he wrote.

Barclays said to aid in improving the quality of the inference, it has created a "simple state-space model" that infers the underlying trend of monthly wage growth from available indicators.

Wage deceleration "has been modest, at best," according to its model, with underlying wage inflation still running at roughly 5.4% year-over-year. Month over month, the rate has edged down slightly to 0.418% from 0.42% in September and a peak of 0.459% last March.