Title: Strong Jobs Report Creates Market Volatility: Will the Fed Raise Interest Rates?
Subtitle: Wage Growth and Inflation Indicators Paint a Different Picture
Date: October 04, 2023
The release of September’s job report by the government on Friday morning sent shockwaves through the market, causing a flurry of activity as traders reacted to the surprising data. The initial response was a mix of skepticism and concern, as investors questioned whether the positive job numbers were too good to be true. The repercussions were felt across various sectors, with the 10-year Treasury bond experiencing a nearly 2% drop and the stock market appearing poised for further decline following Tuesday’s significant drop in the Dow Jones Industrial Average.
However, as the day progressed, the market sentiment shifted, and by the end of the trading day, the S&P 500 had rebounded, closing with a 1.2% gain. The 10-year Treasury bond also recovered some of its losses. Additionally, the likelihood of a rate hike by the Federal Reserve on November 1 decreased after the initial spike earlier in the day. This turnaround in market dynamics can be attributed to several factors indicating a cooling job market rather than a booming one.
One crucial observation from the labor data was the relatively modest increase in wage inflation. Despite the Labor Department reporting a gain of 336,000 jobs in September, wage growth remained below expectations, suggesting a less robust labor market. Economist Daniel Zhao from Glassdoor.com stated that the data did not warrant higher interest rates, as wage growth was considerably lower than anticipated.
While the economy added a significant number of jobs, average hourly income only rose by 0.2%, mitigating concerns about inflation being fueled by a tight labor market. Moreover, this wage increase aligns with the Federal Reserve’s 2% inflation target. Elizabeth Crofoot, a senior economist at labor-analytics company Lightcast, emphasized that wage growth of around 3.5% is an ideal level to maintain a balance between inflation and productivity growth.
Economists and bond investors held divergent views throughout the week regarding the labor data. The release of the JOLTS report on Tuesday, which showed a considerable increase in job openings, triggered concerns among bond investors. However, economists focused on the quits rate, a more accurate metric for measuring wage increases driven by workers moving to higher-paying positions. This rate remained unchanged, indicating a stable job market.
Goldman Sachs chief economist Jan Hatzius emphasized that stability and price control are the Federal Reserve’s priorities, rather than creating unemployment for its own sake. The reported signs of price stability thus became the key numbers for consideration.
Looking ahead, the upcoming inflation reports will play a pivotal role in shaping the Fed’s decision-making process. The consumer price index for September, set to be released on October 12, is predicted to increase by 0.3% monthly, with a year-over-year inflation rate of 3.6%. The report on the Personal Consumption Expenditures Price Index by the Commerce Department on October 27 will also provide crucial insights.
While there are other factors at play, such as concerns over government spending, deficits, and risks of delinquencies and defaults, the strong job numbers have raised fears that the Fed may further tighten monetary policy, potentially inhibiting growth in 2024. However, economists argue that the current strong employment figures coupled with declining inflation create an ideal economic scenario, and both market investors and the Fed should embrace this “goldilocks economy.”
As the market continues to respond to economic indicators, all eyes will be on future reports and the Federal Reserve’s response. The potential impact on interest rates and market stability remains a key consideration for investors and economists alike.