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How the latest wage data can fuel the next rally in the S&P/ASX 200 (Index:^AXJO) (ASX:XJO)

Wage growth in latest quarter may be tiny but it could carry a big message to investors. Record low income growth could soon be a thing of the past in this economic cycle.

That will be great news for our market as it looks for the next catalyst to propel it higher after the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) touched a decade and a half high.

The earnings season is going reasonably well with the likes of blood products group CSL Limited (ASX: CSL) and conglomerate Wesfarmers Ltd (ASX: WES) among the latest companies to release pleasing profit results, but we need something extra if we want the top 200 benchmark to deliver another year of double-digit gains.

Wages growth could just do the trick and it’s encouraging to see the seasonally adjusted Wage Price Index (WPI) edge up 0.6% in the June quarter (and 2.1% for the year) compared to 0.5% in the previous quarter.

It’s a tiny up-tick but it could signal the start of a recovery that will take the WPI off its lows as the outlook for wage growth is looking brighter.

I am becoming more confident of the upturn because most of the wages growth in the quarter came from Victoria and Tasmania with each recording growth of 2.5%. Mining states like Western Australia are at the opposite end with a 1.5% increase.

But the latest results from our miners like Rio Tinto Limited (ASX: RIO) indicate that the labour market in WA is tightening as miners are ramping up exploration and production to capitalise on buoyant commodity prices.

Our resource companies have to compete for workers amid the boom in infrastructure construction, and that can only mean one thing – higher wages.

Income growth could be heading back above the 3% mark over the next 12 months and that will provide a new and much needed tailwind for our market.

The first to feel the positive impact will be consumer discretionary stocks, including struggling auto retailers like AP Eagers Ltd (ASX: APE) and department store Myer Holdings Ltd (ASX: MYR).

Mall operators like Scentre Group (ASX: SCG) and Vicinity Centres Re Ltd (ASX:VCX) will also breath a sigh of relief, as will our banks like Commonwealth Bank of Australia (ASX: CBA) who have been weighed down by slowing credit growth and worries about the health of household balance sheets.

Of course, retailers and malls are also hit by the shift to online shopping but the wage trend will certainly help ease the pain.

However, good wages growth may not be enough to save the property market from easing further given that consumers are still heavily debt-laden, but it could very well stem the rate of decline – and that would be a big positive for our share market.

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Motley Fool contributor Brendon Lau owns shares of Rio Tinto Ltd. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. The Motley Fool Australia has recommended Scentre Group. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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