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Markets Rise as Investors Like the Look of Hiring and Wage Trends


For investors as well as policymakers, bad news can be good news when it comes to the job market.

Stocks rose on Friday after new data showed hiring continued at a good pace in December, but wages rose more slowly than economists had forecast, easing pressure on the potential impact. potential of wage increases on overall inflation.

The S&P 500 rose 2.4% in afternoon trading. Coming after a slow start to 2023 for Wall Street, the rally means the index will end the first trading week of the year with modest gains.

The Labor Department reported that employers added 223,000 jobs in December and the unemployment rate fell to 3.5%. Average hourly earnings rose 4.6%, lower than forecast and below November’s 4.8%, revised down.

Investors have focused on labor market data as they try to predict the path of interest rates. The Federal Reserve last year briefly raised interest rates in an attempt to bring down persistently high inflation by slowing the economy.

Towards the end of the year, the data began to suggest that inflation may have started to moderate. However, the labor market remains an important piece of the puzzle, with stiff competition for workers driving wages higher and causing inflation. In other words, a strong labor market has adversely affected the Fed’s mandate to reduce inflation.

So, a slight drop in wage growth was welcomed on Friday by stock investors eagerly awaiting the end of the Fed rate hike, which has increased costs for companies and helped pull the stock price lower. Lisa Cook, the Fed governor, said in a statement Friday that “recent data suggests that wage growth has actually begun to decelerate somewhat over the past year.”

Investors have begun to revise down their expectations about how high Fed officials will raise interest rates and how long they will keep borrowing costs up.

Yields on the two-year Treasury note, sensitive to changes in Fed policy, fell on Friday, trading at just under 4.3%. Investors are now betting on a 1/4 point rate hike at the Fed’s next meeting in February, a step down from December’s half-point gain, which has fallen short of the 3-point increase. The 4 giant spots took place in the previous 4 meetings. the meeting. The Fed’s key policy rate is currently set between 4.25 and 4.5%.

The Fed has warned investors about going ahead and making assumptions about ending the Fed’s anti-inflation campaign before it actually ends. Rising share prices and falling borrowing costs based on signs of falling inflation enrich investors, increasing economic demand that can lead to inflation.

“Unwarranted easing of financial conditions, particularly if prompted by public misunderstanding of the committee’s response function, would complicate the commission’s efforts to restore price stability,” notes the minutes of the Federal Reserve’s December meeting. released this week.

Thomas Barkin, chairman of the Richmond Fed, repeated the central bank’s pledge to tackle inflation on Friday, referring to a period 50 years ago in which prices spiked and remained at multi-year high. “The experience of the 70s shows that if you stop inflation too soon, it comes back stronger,” he said.

For some investors, that increases the likelihood of a more severe recession, as the Fed’s determination to tame inflation risks pushing the economy into recession.

Analysts have lowered their expectations for the next round of corporate earnings, forecasting earnings to fall for the first time since Q3 2020, according to research firm FactSet.

“With record low unemployment suggesting there is still a lot of work ahead, the Fed’s policy rate is expected to rise above 5% in just a few months, and a potential landing hard this year is very high. ” said Seema Shah, global chief strategy officer at Principal Asset Management. “The recession clock is ticking.”

Jeanna Smialek and Ben Casselman contribution report.

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