Whether you think it’s transitory or here to stay, inflation is still front-of-mind for equity investors.

On that front, Australia gets another key economic update this week; quarterly wages data (Wednesday, 11:30am EST).

This week’s wages print follows on from the RBA’s closely-watched November meeting.

The central bank ditched its yield curve control policy on three-year bonds, although it still doesn’t think rate hikes are on the cards anytime soon (2023 at the earliest).

The market disagrees though.

And that brings wage data into focus because in the RBA’s view, sustainable wage growth above 3% is a key factor in determining whether inflation can remain elevated above 2%.

In their assessment, CBA bond strategists Martin Whetton and Phillip Brown reckon the wage price index “is likely to be a ‘make or break’ for the Australian market”.

“Anecdotes from our corporate clients continue to focus on the wage pressures that are being caused by pent up demand and border closures,” they added.

Wage growth — what’s the number?

In her forecast for Wednesday’s wage print, CBA senior economist Kristina Clifton said upward pressures should materialise due to some factors unique to the September quarter.

For starters, most of this year’s 2.5% lift in award wages will flow through in Q3, with “a handful of workers receiving the increase in Q4”, Clifton said.

In terms of the timing, it marks a notable difference from 2020 where a 1.75% lift in award wages was paid out over three quarters (rather than a concentrated lift in one quarter).

“The different arrangement this year compared to last should boost the annual growth rate,” Clifton said.

CBA predicts a quarterly increase of 0.6%, which will flow through to an annual lift of 2.2% (up from 1.7% in Q2).

Watch the bond market

In that context, the 2.2% figure will be a useful barometer to assess any market surprises.

For example, a wage print comfortably above that number could present some unexpected surprises — the impact of which may initially be reflected through selling pressure in bond and currency markets.

To start the week, Whetton and Brown noted that Australian bonds actually found demand on Monday (which means yields declined).

“The move was relatively consistent for most of the day – though there was a late wobble,” they said.

Pathway to normal

In addition, Whetton and Brown pointed out that “the long, slow path to re-normalisation of the cash markets took an important step” forward.

Since January , the RBA’s overnight cash rate has been set at 0.03%. On Monday, it inched higher (to 0.04%).

“Volumes are still small (only $584m), but this is a notable pick up from the functionally zero results seen for most of the year,” they said.

So while the early changes (including the YCC change) are incremental in nature, monetary policy is slowly beginning to tighten.

In that environment, equity investors will be on the lookout for any unexpected upside surprises to inflation and wage growth in the weeks and months ahead.