Economists are betting that the labor market cooled in December. That may be music to investors' ears.
Wall Street will get the last jobs figures for 2022 on Friday morning. The US government is expected to report that 200,000 jobs were added in December, according to forecasts of economists surveyed by Reuters. That would be a slowdown from the 263,000 jobs added in November.
Traders are betting on a further deceleration in jobs growth because that could lead to a reduction in the size of interest rate hikes by the Federal Reserve.
The Fed spooked markets last year by aggressively raising rates to fight inflation. US stocks suffered their worst annual losses since 2008.
But after four straight increases of three-quarters of a percentage point between June and November, the central bank boosted rates by "only" a half-point in December. The Fed's key short-term interest rate is now in a range of 4.25% to 4.5%.
Fed chair Jerome Powell hinted that a further slowdown in Fed tightening could be in the cards. Hopes that inflation pressures are easing helped stocks recover a bit in the fourth quarter.
Investors are now pricing in about a 70% chance of just a quarter-point rate increase at the Fed's next meeting on February 1, according to Fed funds futures on the Chicago Mercantile Exchange.
Still, traders have been glued to economic reports even more than usual as of late, and stocks have been incredibly choppy based on what the latest figures indicate about inflation.
Wednesday's weaker than expected report on the health of the manufacturing sector, coupled with more signs of strength in the jobs market given the solid report about labor turnover, led to more market volatility.
The investor takeaway? Rate hikes ARE slowing the economy but we can expect inflation pressures to persist if the job market remains robust.
That's why investors will also be poring over the weekly jobless claims numbers that come out Thursday morning as well as a report from payroll processing company ADP about the private sector job market. Further strength could set off more alarm bells about inflation and Fed rate hikes.
Focus on worker pay: Wall Street will also need to dive even deeper into Friday's jobs report to get a better sense of what's happening in the economy. The unemployment rate is expected to remain at 3.7%, close to a half-century low.
The level of wage growth will also be under scrutiny. An increase in worker compensation historically tends to lead to more inflation. Consumers can afford to pay the higher prices that companies charge for their products and services if they have more disposable income.
Investors cheered the fact that wage growth, measured by average hourly earnings, rose only 4.7% over the previous 12 months in October. But year-over-year wage growth perked back up to 5.1% in November. Economists are predicting that wage increases cooled a bit, to 5% annually, in December.
That may not be enough of a slowdown to please the Fed.
"The persistent mismatch between labor supply and demand continues to put upward pressure on wages," said Lauren Goodwin, economist and portfolio strategist at New York Life Investments, in a report.
Goodwin added that 5% wage growth is "well above a level commensurate with the Fed reaching its 2% inflation goal."
A report by strategists at the BlackRock Investment Institute also noted that inflation for services companies (think retail, banking and tech, among others) is likely to remain "sticky due to worker shortages fueling wage growth."
In other words, the Fed is likely to focus more on worker paychecks in Friday's jobs report than the number of jobs added. Wall Street may do the same.
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