Federal Reserve Chair Jerome Powell unleashed the S&P 500 on Wednesday, but a continued rally will depend on whether economic data supports the bull case. The January jobs report, out Friday at 8:30 a.m. ET, offers the first big test of whether wage growth and inflation will moderate convincingly enough for the Fed to pause rate hikes in March.
Jobs Report Expectations
Wall Street economists expect the Labor Department's jobs report to show a 185,000 rise in employer payrolls, down from 223,000 in December. Average hourly earnings are expected to rise 0.3% on the month, lowering the 12-month gain to 4.4% from 4.6%. The unemployment rate should tick up to 3.6% from the current 3.5% rate that's tied for the lowest in more than a half-century.
Wage Growth Is Key To Federal Reserve Outlook
If those not-too-hot, not-too-cold jobs report forecasts are on target, the current stock market rally should have more room to run. What might stall the S&P 500's momentum? Another month of rock-bottom unemployment might make the Fed sweat a little, but hotter-than-expected wage growth would be a yellow flag.
The biggest spark for this week's S&P 500 rally came on Tuesday, when the Employment Cost Index for Q4 showed total pay growth slowed to 1%. That marked three straight quarters of deceleration from a peak of 1.4% in last year's first quarter. Excluding incentive-paid occupations, for which volatility in sales commissions muddy the picture, private-sector compensation costs rose 0.9%, or a 3.6% annualized pace.
That's just a hair above the 3.5% wage growth that Powell has said would be consistent with the Fed's 2% inflation target.
In his Wednesday news conference, Powell highlighted the importance of the Q1 ECI report, which is due out the week before the pivotal May 2-3 Fed meeting.
An upside surprise for wage growth in January probably wouldn't be a deal-breaker for this S&P 500 rally, because it's just one month, but it might dampen animal spirits.
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Job Quitters Still Getting Big Pay Hikes
Vanguard senior economist Andrew Patterson wrote in a Thursday note that he's predicting an "uptick in wage growth" for Q1. He cited the still-elevated level of quits, as people seek higher-paid work, and "structural labor supply issues."
The Labor Department's Job Openings and Labor Turnover Survey showed 4.1 million quits in December, equal to 2.7% of workers. That's about 15% higher than the 2.3%-2.4% range that prevailed before the pandemic.
On Wednesday, payroll processor ADP reported that pay growth for job changers accelerated to 15.4% in January. Meanwhile, pay growth for jobs stayers was flat at 7.3%.
Jobs Report To Update Population
Some economists predict job growth as high as 300,000 for January. However, investors might take a big headline job gain in stride. That's partly because January jobs reports are notable for huge seasonal adjustments. Retail, warehousing and temp services employers hired fewer seasonal workers in Q4. Fewer layoffs of seasonal workers in January could translate to solid hiring on a seasonally adjusted basis.
Another feature of January jobs reports is the Labor Department's annual adjustment for population growth. Some economists expect Friday's data to show higher labor force participation thanks to more immigration in 2022. More immigration, though politically contentious, means more slack in the labor market, which could help ease wage pressures.
Powell Gives S&P 500 Green Light
Wednesday's policy statement noted that policymakers expect "ongoing increases" in the Fed's key interest rate. Though hardly bullish, the S&P 500 went on a tear after Powell took to the podium. Wall Street seized on Powell's optimism that the economy can skirt a recession and his lack of concern about the latest big S&P 500 rally and drop in Treasury yields.
Minutes from the December Fed meeting highlighted concern that easier financial conditions could make it harder to tame inflation. Yet Powell now seems OK with higher stock prices and lower market interest rates based on "the market's expectation that inflation will move down more quickly."
Fed policymakers see a slower descent for inflation, which would push rate cuts to 2024. Yet Powell didn't rule out a rate cut in 2023, "if we do see inflation coming down much more quickly."
Inflation and wage growth have receded to levels that have doused a sense of panic at the Fed. Powell no longer worries what the S&P 500 does from week to week. That's great news as long as inflation keeps moderating. Yet the S&P 500 might turn out to stray too far on the upside, if the data disappoint.
In Thursday afternoon stock market action, the S&P 500 climbed about 1%, adding to Wednesday's 1.05% gain. Through Wednesday's close, the S&P 500 had rallied 15.2% off its Oct. 12 bear-market closing low, but was still 14.1% below its all time high.
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