When it comes to the job market, bad news can be good news for investors and policymakers alike.

Shares rose on Friday after new data showed hiring continued at a healthy pace in December but wages grew more slowly than economists forecast, easing pressure on the potential impact of rising wages on overall inflation. Gone.

The S&P 500 rose 2.4 percent in afternoon trading. After a sluggish start to 2023 for Wall Street, the rally meant the index was set to 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 percent. Average hourly earnings rose 4.6 percent, which was lower than forecast and lower than November’s figure of 4.8 percent, which was revised downward.

Investors are focusing on labor market data as they try and predict the path of interest rates. The Federal Reserve raised interest rates sharply last year in an effort to reduce extremely high inflation by slowing the economy.

At the end of the year, data began to suggest that inflation may have begun to ease. However, the labor market remains an important piece of the puzzle, with intense competition for workers driving wages higher and inflation rising. In other words, a strong labor market has been bad for the Fed’s mission to reduce inflation.

So Friday’s easing pace of wage increases was welcomed by stock investors eager for an end to the Fed’s interest rate hikes, which have raised costs for companies and helped drive down stock prices. Fed Governor Lisa Cook said in a speech on Friday that “recent data suggests that labor-compensation growth has actually begun to decelerate somewhat over the past year.”

Investors have begun to revise downward their expectations on how Fed officials will raise rates and for how long they will keep borrowing costs high.

The two-year Treasury yield, which is sensitive to Fed policy changes, was trading as low as 4.3 percent on Friday. Investors are now betting on a quarter-point hike in rates at the Fed’s next meeting in February, a step down from December’s half-point hike, which was already a downgrade from the jumbo three-quarter-point hike last week. Came in four. meetings. The Fed’s key policy rate is currently set in a range of 4.25 to 4.5 percent.

The Fed warned investors to get ahead of themselves and make assumptions about the end of the Fed’s campaign against inflation before it actually does. Rising stock prices and falling borrowing costs enrich investors based on signs of declining inflation, increasing economic demand that can outpace inflation.

The minutes of the Federal Reserve’s December meeting, released this week, noted that “unwarranted easing of financial conditions, especially if driven by a misconception by the public of the committee’s response function, may interfere with the committee’s efforts to restore price stability.” would complicate it.”

Richmond Fed President Thomas Barkin on Friday reiterated the central bank’s commitment to tackling inflation, referring to an episode 50 years ago in which prices rose and remained high for years. “The experience of the ’70s showed that if you hit inflation too soon, it comes back strong,” he said.

For some investors, this raises the prospect of a more severe economic downturn, as the Fed’s determination to eliminate inflation risks driving the economy into recession.

Analysts have lowered their expectations for the next round of corporate earnings, forecasting the first earnings contraction since the third quarter of 2020, according to research firm FactSet.

“With the record-low unemployment rate indicating they still have a lot of work ahead of them, Fed policy rates are likely to rise above 5 percent within a few months, and a hard landing appears the most likely outcome this year.” Happens,” said Seema Shah, chief global strategist at Principal Asset Management. “The recession clock is ticking.”

Gina Smilec And ben castleman Contributed reporting.

#Market #Growth #Investors #Hiring #Wage #Trends

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