Wall Street is concerned that the Fed’s rate hikes would cause stock prices to decline despite the record-low unemployment rate. The U.S. job market is remains strong even after several successive rate increases. More and more individuals getting jobs is turning out to be not a good news for Wall Street investors. Inflation is fueled when the labour market is strong and wage growth is putting more money in workers’ pockets. This is mostly due to increased demand for currently offered products and services while the US economy continues to struggle with supply challenges. A growing employment sector is perhaps what the central bankers do not want.
Capital markets are tumbling after an outstanding run to start the year, which is a sign of momentum reversing. Although Jerome Powell, the chairman of the Federal Reserve (Fed), struck a dovish tone at the beginning of February, recent earnings reports and the most current economic indicators suggest otherwise. Markets are reacting strongly to the implication of a more hawkish Fed as corporate earnings weaken.
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“Powell has warned that wage pressures are a significant inflation concern and this morning’s data shows the wage pressures are still strong. Markets are getting hit with a traditional one-two, jab-cross punch combination as incoming data point to accelerating inflation and deteriorating earnings,” says José Torres, Senior Economist at Interactive Brokers.
Payroll employment increases much beyond estimates, totaling a staggering 517,000 positions, well exceeding the 260,000 from last month and the 185,000 anticipated. With the unemployment rate at 3.4%, which is the lowest it has been since 1969, it is clear that there is a severe shortage of workers.
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“The scarcity of workers continues to generate an environment of elevated wage pressures, with wages up 0.3% month-over-month (m/m) or 3.6% on an annualized basis, which is inconsistent with the Fed’s 2% inflation target. To make matters worse in terms of heat, the ISM services index reported a 55.2% reading for January, shattering expectations of 50.4% and returning to growth after a mere one month in contraction with a 49.2% reading in December,” says Torres.
Consistently strong labour data, whether faster wage growth or stronger labour demand, both of which are good for workers, is seen as bad news by investors, as it almost guarantees the Fed will have to press harder on the brakes or will take time to pause rate hikes.
“On balance, today’s macroeconomic environment reflects sticky inflation concentrated in the service areas of the economy and contracting earnings as the consumer slows down. Job reports are likely to keep the Fed on the market’s back via valuations, while the stresses of higher inflation and elevated interest rates continue to weigh on corporate earnings and revenues. Dovish Powell may have sowed the seeds for a February fiesta, but today’s reports may have established the foundation for a February flush,” adds Torres.