There is little doubt in my mind the Reserve Bank board is becoming increasingly concerned about the level of household debt, sluggish wages growth and the implications for consumption and economic growth, should interest rates rise. The board does not want to seem alarmist and so the language used in the minutes of monetary policy meetings is subdued.

Reading between the lines of the May meeting minutes there is certainly a discernible cautionary thread. While tighter credit standards and supervisory measures had helped in containing the build-up of risk on household balance sheets, board members noted debt levels "continued to pose an element of uncertainty for the outlook of consumption growth." In the wake of the royal commission, a further tightening in lending standards was possible "which would affect household borrowing and spending."

Members agreed the next move in the cash rate "would be up, rather than down" and there "was not a strong case for a near-term adjustment in monetary policy." It is stating the bleeding obvious, with the money market currently pricing in a 25-point increase in mid-2019.

While household debt levels are of concern, so also is the lack of wages growth, the lifeblood of household income and consumption, especially with the household savings ratio at depressed levels. Despite positive readings of job vacancies and hiring intentions and the lack of suitable labour, growth in the wage price index has not picked up as much or as quickly as surveys previously implied. This divergence is also evident in the U.S. Members noted spare capacity in the labour market would remain "for some time" and progress in reducing unemployment was expected "to be gradual."

Subsequently, there was little good news for wage earners or the Reserve Bank in the release of the March quarter wage price index. Seasonally adjusted wages growth of 0.5% from the December quarter was below the expected 0.6%, with year-on-year growth of 2.1%. Private sector wages increased 1.9% and the public sector 2.3%. The 400,000 plus jobs created in 2017, mostly in the private sector, have not generated any meaningful upward pressure on wages.

The share market responded positively to the wage growth data as the timing of an increase in the official cash rate gets pushed out further. With another quarter of below trend wages growth, household consumption, the main driver of economic growth, is once again under pressure. And please don't mention forecasts of petrol prices moving north of $1.60 per litre.

Australian job vacancies remain well below those unemployed. According to the Australian Bureau of Statistics, at end February vacancies of private and public sectors totalled 220,800 compared to 731,500 unemployed. There is still plenty of capacity in the labour market and strong migration is not helping tighten the market.

April data showed 22,600 jobs added with 32,700 full-time offset by 10,100 part-time losses. The unemployment rate increased from 5.5% to 5.6% as the participation rate edged higher from 65.5% to 65.6%. Consensus expected 5.5%. Positively, hours worked increased. Unemployment of 5.6% together with underemployment at 8.4% indicates labour market spare capacity at 14%.

Bloomberg consensus data indicates earnings of the S&P/ASX200 are expected to grow at 13.6% this year, 1.7% next year and 4.1% the following year. If wages growth is sluggish against a 13.6% earnings growth clip, what can one expect if consensus forecasts eventuate and earnings growth slows sharply? Frustrated wage earners along with Reserve Bank board members could be waiting a long time before light appears at the end of the tunnel. Below trend wages growth seems set to continue for some time.

Research of the Week

This week, a contrarian and perhaps controversial piece on Telstra (ASX: TLS) - see page 3 of this week's newsletter. Brian Han outlines the path to cutting core underlying fixed costs from the current annual run rate around $8bn to $6.5bn by FY22. This is a must do for Telstra as the NBN roll-out slashes $3bn from its annual EBITDA. The current market price of $2.90 is a long way from Brian's $4.40 fair value estimate. All shareholders will be hoping Brian is on the right track.