Why this number is a big deal for the Fed

Published Thu, Jul 30 20154:08 PM EDTUpdated Thu, Jul 30 20155:14 PM EDT

Patti Domm @in/patti-domm-9224884/@pattidomm

The employment cost index on Friday could show enough of a pickup in wages to sway the betting on a September Fed rate hike. The ECI last quarter rose a surprise 0.7 percent, ramping up speculation way back in late April that wage inflation was finally starting to kick in enough to encourage the central bank to move toward normalization. Since then, however, other data did not come along so much, and widely followed average hourly earnings, included in monthly employment reports, were actually unchanged in June. The market has been looking for a slightly softer second-quarter gain. Mesirow Financial's chief economist, Diane Swonk, said that's because the first-quarter ECI was boosted by fees and commissions and some of that is expected to be reduced. But the Fed is watching for incremental improvements in wages, and the ECI with the right mix of other jobs and inflation data could "greenlight" a Fed rate hike for September, she said. Last quarter, ECI numbers came against a much more mixed backdrop for employment data. Now, with the Fed gearing up to cut rates before year-end, and with jobless claims this month touching 42-year lows, a surprise jump in second-quarter ECI could be even more impactful. The Fed, in fact, described the labor market as "solid" in its statement this week. "We are expecting 0.6 on the headline, and 2.4 percent over a year ago," said Daniel Silver, a JPMorgan economist. "Both those numbers are a little softer than what we saw in the first quarter, but if we go on a broader time frame, it looks like things are picking up." Read More GDP a dud but gives Fed inflation glimmer As for the Fed, "This is one of the measures they watch, so it's important," said Silver, adding a surprise either way would be a big deal. Inflation has come up short and wage inflation would be a first sign that a pickup is coming in broader gauges. The Fed has said it is "reasonably confident" it will get the 2 percent inflation rate it wants. JPMorgan expects the Fed to hike rates for the first time in September, a majority view among economists. However, the futures market has been pricing bigger odds of a first rise for December so a hotter ECI could impact markets. Read More Street: Buy steady stocks for a skittish market

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The employment cost index on Friday could show enough of a pickup in wages to sway the betting on a September Fed rate hike.

The ECI last quarter rose a surprise 0.7 percent, ramping up speculation way back in late April that wage inflation was finally starting to kick in enough to encourage the central bank to move toward normalization.

Since then, however, other data did not come along so much, and widely followed average hourly earnings, included in monthly employment reports, were actually unchanged in June.

The market has been looking for a slightly softer second-quarter gain.

Mesirow Financial's chief economist, Diane Swonk, said that's because the first-quarter ECI was boosted by fees and commissions and some of that is expected to be reduced.