January 28, 2023

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Lower-than-expected wage growth sent Wall Street straight up

Wall Street opened broadly higher on the last trading day of the week. In other words, the labor market report was well received by Wall Street investors, as was revised wage growth from last month.

Already in the opening minutes, the main indicators rose significantly. At the end of the trading day at 22:00 Norwegian time, the three major indices looked like this:

  • The broad S & P 500 index rose 2.2 percent.
  • The Dow Jones Industrial Average rose 2.1 percent.
  • The main index of the Nasdaq Technology Stock Exchange rose 2.5 percent.

Investors are rejoicing at the revised wage growth figures from last month, which ended less than expected.

Reported wage growth was 0.3 percent from November to December, beating expectations among economists for 0.4 percent.

The news pleases investors, says Michael Aron, investment analyst at State Street Global Advisors.

– Arone says all investors pay attention to reports that inflation is heading toward the Fed’s target.

Employment increase

This month’s US employment numbers may be what causes Central Bank Chairman Jerome Powell and the rest of the Fed’s interest rate committee to tick the box for another rate hike, so there was a lot of excitement associated with the new numbers.

The number of new jobs in the US labor market, outside the agricultural sector, was previously expected to be 202,000. This is shown by an overview from Bloomberg and the news agency’s survey of economists and analysts. In November it ended 263,000 new employees, which was much higher than the market expected. Employment in November also remained at the same level as in October. Now the December report shows the number of new jobs was 223,000, the lowest number in more than a year.

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In November, unemployment ended unchanged at 3.7 percent, but after that labor force participation eased somewhat. An unemployment rate of less than four percent is considered too low in the United States, and for the Federal Reserve, a target of 4.7 percent should be the best. In other words, the number of new jobs is not the only thing the Fed considers when assessing whether it should increase the 4.25-4.5 percent target in interest rates.

The December report shows that the unemployment rate ended at 3.5 percent, which will give Powell arguments for another rate hike. At the same time, the unemployment rate for November was revised to 3.6 percent.

pressure on Powell

On the other hand, we see that job growth remains strong and is clearly above the levels we had before the pandemic, but there are signs that monthly growth is slowly but surely decelerating. The unemployment rate fell by a tenth to 3.5 per cent, despite the fact that the participation rate rose, which indicates in isolation that labor markets are still very strong, says Kjetil Martinsen, chief economist at Swedbank.

Kjetil Martinsen is chief economist at Swedishbank.

Kjetil Martinsen is chief economist at Swedishbank. (Photo: Michaela Berg)

The fact that stock market indices rose cautiously on Friday afternoon, and that the two-year market interest rate fell, may indicate that financial markets largely believe that the Federal Reserve is done with making the biggest rate hikes. Martinsen believes that many indicators point to a new rate hike, but the labor market report is sending mixed signals.

Other indicators of the labor market have remained on the strong side lately. Earlier in the week, we received numbers that showed the number of job vacancies remains high, Martinsen says, before adding:

On the positive side, wage growth appears to be moderating somewhat. At the same time, last month’s figures were revised downward. This is a positive sign regarding service inflation in the future.

On a yearly basis, wage growth came in at 4.6 percent, which was kind of lower than the expected 5.0 percent.

In general, the Fed wants to see inflation fall to 2% over time. Recently, we’ve seen that commodity inflation, which picked up a lot during the pandemic, and energy prices have come down somewhat year-over-year. But with a historically tight labor market and associated high wage growth, it takes more for the Fed to see inflation stick around its inflation target, Martinsen says, adding:

Friday’s numbers confirm that the job is not done, and we are likely to see more interest rate increases in the future.

Martinsen believes that today’s numbers don’t help reinforce one view or the other about where interest rates should peak.

At Handelsbanken, chief economist Marius Gunsholt Hof noted that several indicators pointed to a “small step in the right direction” in terms of basic wages and price pressure.

Chief Economist Marius Gunsholt-Hof at Handelsbanken.

Chief Economist Marius Gunsholt-Hof at Handelsbanken. (Photo: Thomas T. Kelvin)

– At the start, 223 thousand was somewhat higher than forecasts, as analysts had previously predicted job growth of up to 200 thousand people. The figures for the previous two months were revised downward by a total of 28,000, so this was somewhat at the level expected, says Handelsbanken analyst shortly after figures from the US Department of Labor were released.

Good numbers for the Fed.

Guncholt Hoff adds that it’s the narrowing of the labor market that the Fed is particularly concerned about:

– And here I think there was some good news today. Of course, the unemployment rate surprisingly declined in December, which is independent of the lack of supply, but labor force participation rose more than expected, and wage growth was somewhat weaker than expected. We also note here that the wage figures for November have been revised downward.

Primarily, it’s the interest rate meeting at the turn of the month that’s getting attention right now, says Jonsholt-Hof.

Prior to these figures, the interest rate market was completely on edge over whether the Fed would concede further to a 25-point rate hike, or do another double hike. After the numbers on Friday, expectations should shift more towards tapering. At the very least, we see a temporary two-year drop in the US interest rate, which is very sensitive to changes in the Fed’s outlook. But this has not yet been decided. At the very least, we should keep a close eye on US inflation numbers coming out this week, as further declines in both headline and core inflation are expected.(Conditions)Copyright Dagens Næringsliv AS and/or our suppliers. We’d like you to share our statuses using links that lead directly to our pages. Reproduction or other use of all or part of the Content may be made only with written permission or as permitted by law. For additional terms look here.