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Robust jobs data, hawkish Fed comments send markets into tailspin

The economy is robust and jobs plentiful, but inflation has the Federal Reserve upping its hawkish comments, and that has caused investors to flee equities.  

MANHATTAN (CN) — Markets were routed this week after a bevy of reports showed the job market hasn’t loosened up, compounding hawkish comments by the leading Federal Reserve official before Congress.

Nearly each day saw significant losses, and by the week’s end the Dow Jones Industrial Average lost 1,481 points, while the S&P 500 dropped 184 points and the Nasdaq fell 551 points.  

The carnage began on Tuesday, when Fed Chair Jerome Powell gave his biannual address to Congress, appearing before related Senate and House committees. Normally such testimony offers a few glimpses into the central bank’s approach and hints to what it may do on interest rates.

This time, though, it caused somewhat of a ruckus on Wall Street after Powell suggested that the recent pricing reports may cause the Fed to extend its final series of interest rate hikes or increase the percentage of coming rate hikes.

“As I mentioned, the latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated,” Powell said during his testimony. “If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.”

Markets dropped somewhat after Powell’s testimony, but the sell-off accelerated by the close of business that afternoon, with the Dow dropping 575 points and the S&P falling by 62 points. “Judging by the initial market reaction, most of this was already priced in,” said Chris Zaccarelli, chief investment officer at the Independent Advisor Alliance, “but there must have been some holdouts who truly believed that the Fed would be cutting this year, and that is extremely unlikely at this point.”

Experts note that Wall Street — which had dealt with the Fed tapering its interest rate hikes, with just a 0.25% increase last month — has changed its previous forecast for 75 basis points worth of interest rates over the Fed’s next four meetings to a 1% increase during that period. “Inflation is clearly not moderating quickly enough for the Fed,” Ryan Sweet, chief U.S. economist at Oxford Economics, wrote in an investor’s note.

Sweet noted that some parts of the economy, such as housing, are less sensitive to interest rates than in the past. He also wrote the Fed is “setting monetary policy in a data fog” since a warmer winter likely “juiced retail sales and employment” for January, and that response rates for nonfarm employment and job openings are lower than usual.

Jobs data released this week likely did nothing to dissuade the central bank that the U.S. economy is cooling appropriately.

The payroll report released by ADP on Wednesday showed private sector employment gained 242,000 jobs last month, more than double the jobs gained in January and better than the 200,000 prediction. Annual pay also has grown 7.2% year-over-year, which is bad news for those hoping inflation will soon drop heavily.

“There is a tradeoff in the labor market right now,” ADP Chief Economist Nela Richardson said in a statement. “We’re seeing robust hiring, which is good for the economy and workers, but pay growth is still quite elevated. The modest slowdown in pay increases, on its own, is unlikely to drive down inflation rapidly in the near-term.”

Also on Wednesday, the summary of job openings and labor turnover by the U.S. Bureau of Labor Statistics showed that job openings fell by 410,000 in January while the gap between job openings and active jobseekers narrowed by 382,000. The quits rate also fell to 2.5%, its lowest level since February of last year.

Some experts say the JOLTS report shows the ripple effect of the Fed’s rate tightening, but the employment report released on Friday dispelled any notions that the job market is shrinking. On Friday, the February employment report from BLS confirms the labor market remains hot, with 311,000 jobs gained, nearly 100,000 jobs above the consensus forecast.

The report also noted, however, that the unemployment rate ticked up from 3.4% to 3.6%, hinting at some cracks in the façade. A day earlier, the unemployment claims for the first week of March showed a slight jump from the prior week. Further, the employment-to-population ratio is still below pre-pandemic levels, which has kept labor conditions tight, and average hourly earnings also increased by 4.6%.

Experts believe the jobs report certainly doesn’t help the case for the Fed to keep their next rate hike at 25 basis points, but the central bank is likely more focused on next week’s Consumer Price Index. Zaccarelli noted the Fed will focus more on CPI than the jobs report, adding, “if the two reports diverge … then the Fed is going to place more weight on the latter one.”

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