The December jobs report shows the economy is still adding jobs at a strong rate, but investors focused on the fact that wage growth is slowing, suggesting inflation may be ebbing.
Stocks rallied after the 8:30 a.m. ET employment report showed 223,000 jobs were created in December. Average hourly wages grew at an annual pace of 4.6%, less than the 5% expected by economists.
“The big move was the fact that average hourly earnings came in lower than expected. That suggests that investors are focused intently on inflation, and whether that inflation is moving toward the Fed’s target,” said Michael Arone, chief investment strategist at State Street Global Advisors.
But he also cautioned that the data could be double-edged, since it suggests the economy and employment are still strong. That could help keep inflation elevated and keep the Fed hiking more than markets might expect.
The Fed next meets Jan. 31 and Feb. 1. While some economists anticipate a half point hike after that meeting, traders in the futures market put greater odds on a smaller, 25 basis point hike. A basis point equals 0.01 of a percentage point.
“Data like today suggests the Fed could do 50 basis points,” said Arone. A more aggressive Fed could create more market volatility.
The Fed has been trying to slow the economy and the hot labor market through its rate hiking, which has taken the fed funds target rate range to 4.25% to 4.50%.
Peter Boockvar, chief investment officer at Bleakley Financial Group said market expectations did not change after the jobs report, and the fed funds futures contract for February was pricing in another 32 basis points of hikes.
“It’s pricing 100% chance of a 25 basis point hike, and a 30% chance for an additional 25. Peak fed funds is still at 5%” for July, he said. “The market is still expecting the Fed to go another 60, almost 70 basis points,” he said. Boockvar said the end point for the Fed matters more than if it raises by 25 basis points or 50 when it next meets.
–Patti Domm
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