Today’s follow-on to Powell’s speech and yesterday’s economic data dump was today’s nonfarm payrolls report. And unfortunately for the Federal Reserve, the data confirmed the strength shown in the last two days of employment info. 💪
November’s nonfarm payrolls rose 263,000, well above the estimate for 200,000. October’s data was also revised higher to 284,000. The unemployment rate remained flat at 3.7%.
The real problem with today’s numbers was average hourly earnings, which rose 0.6% MoM, double what analysts expected. 😮
The Fed clarified that wage gains are healthy but only when it’s in line with 2% inflation. So the current increases will only further exacerbate the labor supply/demand imbalance and keep inflation high, particularly in the services sector, where wages are a significant cost component. And since services inflation is half of the core personal consumption expenditures index (PCE) that the Fed uses to track inflation, that’s not great.
The TLDR version is: A strong labor market means strong wage growth. Strong wage growth means higher services inflation. And higher services inflation means continued upward pressure on the Fed’s preferred inflation metric. 👎
As a result, good news for the economy remains bad news for the Fed (and markets). That’s why the initial reaction in stocks was a steep selloff. Because if raising rates rapidly to the 3.75% to 4.00% range couldn’t cool the labor market, then the terminal rate may have to go even higher.
The news caused the market to price in rates above 5%, though at a slower pace than previous hikes. And that is ultimately why investors will be watching future employment data like a hawk for any signs of weakness. 👀