Surprisingly strong job growth and low-tech earnings are weighing on market sentiment
Perhaps what the central bankers do not want is a growing employment sector.
Despite the record-low unemployment rate, Wall Street is concerned that the Fed's rate hikes will cause stock prices to fall. Even after several rate increases, the job market in the United States remains strong. The fact that more people are getting jobs is not good news for Wall Street investors. Inflation is fueled when the labor market is strong and wage growth puts more money in workers' pockets. This is primarily due to increased demand for currently available products and services, as the US economy continues to face supply challenges. What the central bankers do not want is a growing employment sector.
Capital markets are falling after a solid start to the year, indicating a reversal of momentum. Although Fed Chairman Jerome Powell struck a dovish tone at the start of February, recent earnings reports and the most recent economic indicators suggest otherwise. As corporate earnings fall, markets are reacting strongly to the prospect of a more hawkish Fed.
"Powell has warned that wage pressures are a significant inflation concern, and this morning's data shows that wage pressures remain strong. "Markets are being pummeled with a traditional one-two punch of accelerating inflation and deteriorating earnings," says José Torres, Senior Economist at Interactive Brokers.
Payroll employment increased far beyond expectations, totaling 517,000 positions, far exceeding the 260,000 from last month and the 185,000 expected. With the unemployment rate at 3.4%, the lowest since 1969, it is clear that there is a severe labor shortage.
"The scarcity of workers continues to generate an environment of elevated wage pressures, with wages up 0.3% month-over-month (m/m) or 3.6% on an annualized basis, which is inconsistent with the Fed's 2% inflation target. To add insult to injury, the ISM services index reported a 55.2% reading for January, exceeding expectations of 50.4% and returning to growth after only one month in contraction with a 49.2% reading in December," says Torres.
Consistently strong labor data, whether faster wage growth or stronger labor demand, both of which are good for workers, is viewed negatively by investors because it almost guarantees the Fed will have to press harder on the brakes or take longer to pause rate hikes.
"Overall, today's macroeconomic environment reflects sticky inflation concentrated in the economy's service sectors and contracting earnings as the consumer slows. While the stresses of higher inflation and elevated interest rates continue to weigh on corporate earnings and revenues, job reports are likely to keep the Fed on the market's back via valuations. "Dovish Powell may have planted the seeds for a February fiesta, but today's reports may have laid the groundwork for a February flush," Torres adds.