Investors sifted through mixed signals in the U.S. June employment report Friday, with sticky wage gains seen offsetting any relief from a slowdown in jobs growth.
Sure, a strong labor market reflects a resilient economy, which should be good news for the stock market, all things equal. But the worry for investors is that healthy employment growth will halt or slow a drop in inflation that remains well above the Federal Reserve’s 2% annual target, forcing policy makers to raise interest rates further than expected and risk driving the economy into a steeper slowdown or recession.
So a respectable but weaker-than-expected rise of 209,000 nonfarm payrolls in June was viewed by investors as a welcome development, but was blunted by a downtick in the unemployment rate to 3.6% from 3.7% and a higher-than-expected 0.4% monthly rise in average hourly earnings. That left wages up by 4.4% year over year. They were growing around 3% before the pandemic.
“The apparent upturn in wage growth is a problem, though it might not survive revisions; these data are noisy,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics, in a note.
“But policy makers won’t like the recent trend, and the data will be cited by the hawks as a reason to hike further,” he wrote, while noting a monthly survey of small-business owners by the National Federation of Independent Business, pointed to much slower growth in the second half of the year.
Given that wages are a driver of core service sector inflation, the Fed will likely be disappointed that this report did not provide some additional relief on this measure, said Jason Pride, chief of investment strategy and research at Glenmede, in a note.
See: ‘This is the best possible jobs report’: Economists react to U.S. payrolls data for June
Investors may have taken some solace, however, in remarks by Chicago Fed President Austan Goolsbee, who told CNBC Friday morning that the 0.4% increase in hourly wages —which was above consensus of a 0.3% gain— was a lagging indicator and not a sign of higher inflation to come. Goolsbee is a voting member this year of the Fed’s rate-setting Federal Open Market Committee.
Stocks were mixed in low-volume trade Friday, with the Dow Jones Industrial Average
DJIA,
drifting back into negative territory, down 23 points, or 0.1%, while the large-cap benchmark S&P 500
SPX,
advanced 0.3%. Major indexes remained on track for weekly losses.
Yields on U.S. Treasurys, which move opposite to price, were lower, with the policy-sensitive 2-year rate down around 7 basis points near 4.95% after hitting a multi-decade intraday high on Thursday.
The dollar slumped, with the ICE U.S. Dollar Index
DXY,
a measure of the currency against a basket of six major rivals, dropping 0.9%.
Fed-funds traders have priced in a better than 90% probability the central bank will lift its benchmark rate by another 25 basis points, or a quarter of a percentage point, to a range of 5.25% to 5.5% when it meets later this month, according to the CME FedWatch tool.
The probability of the Fed funds rate rising to 5.50% to 5.75% at the Fed’s September meeting fell slightly to 24% from 27.5% on Thursday. For November, futures reflect a roughly 44% probability of a rise to 5.50% to 5.75% or above, versus around 49% on Thursday.
“Today’s jobs report points to a jobs market that is inching in the direction that the Federal Reserve would like to see, one with a little more slack, but still has signs of tightness as well,” Pride said.
“Such a picture is unlikely to more the Fed from its plan of a rate hike at its next meeting. With that said, [the jobs report] is just one data point, and a heavily revised on at that, and thus not the only item to watch for such decisions,” he said.
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