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Troubled by job data, markets kick off 2023 with mild gains

Investors were disappointed early in the week as ADP’s jobs report showed higher-than-expected gains, which indicates the Federal Reserve will continue to hike interest rates.

MANHATTAN (CN) — Failing to do well in late December, Wall Street kept its champagne on ice for the new year and now has something to celebrate with new wage data indicating that inflation is cooling.

Equities had puttered along for most of the first week of January then rallied on Friday with the Dow Jones Industrial Average gaining 483 points for the week — nearly 700 points on Friday — while the S&P 500 netted 55 points for the week and the Nasdaq increased by 103 points.

The monthly jobs report for December released on Friday shows that the unemployment rate has dropped to 3.5%, making it a still-tight labor market. Most of the 223,000 jobs gained last month were in the leisure and hospitality sector, which added 67,000 positions, but the industry is still missing 932,000 jobs from its pre-pandemic highs.

Overall the jobs report was a positive for the economy, though it also continued the trend of a slowing labor market. While previous positive jobs reports in recent months have caused markets to fall for fear of the Federal Reserve’s interest rate hikes, this time Wall Street rallied since the report also included bad news on wage growth.

According to the Bureau of Labor Statistics, average hourly earnings in December slowed to 4.6% annually — a 0.3% increase last month — compared with 5.1% annual wage growth seen in November. Average weekly earnings actually fell last month, from $1,125.91 in November to $1,125.73 in December.

This marks the fourth consecutive quarter that annualized average hourly earnings have dropped, which has some experts calling for the Fed to slow its rate hikes. “That pattern says to me that further 50 [basis point] rate hikes — actually, any further hikes — make no sense, given that prior hikes have yet to feed through fully,” Ian Shepherdson, chief U.S. economist at Pantheon Macroeconomics, tweeted on Friday morning. “Stop now Fed please thanks.”

Others believe the report will keep the fire lit under the Fed since it is apparent that wage pressures are not yet keeping up with inflation.

“This report should add to investor confusion and heighten market volatility in the weeks ahead,” said John Lynch, chief investment officer at Comerica Wealth Management. “It also complicates the Fed’s battle against inflation, though the minutes from the December monetary policy meeting reiterate the committee’s resolve.”

Lynch notes that equities will likely be volatile in the first half of this year until investors “get comfortable with a trough” in gross domestic product and earnings per share, as well as higher interest rates. By midyear, he predicts, markets will likely begin to price in a recovery.

Earlier in the week, other jobs data and further indications from the Fed that it would not back away from efforts to curtail inflation did little to help markets.

According to minutes from the Federal Open Markets Committee meeting last month, the central bank remains somewhat frustrated that its efforts to curb inflation have not yet fully taken hold, blaming “a higher path for equity values and a lower path for the dollar” on counterbalancing its efforts to curb inflation.

Many believe the Fed will raise rates by an additional 0.25% or 0.5% at its upcoming meeting at the end of the month, and the minutes stress that “a slowing in the pace of rate increases was not an indication of any weakening of the [FOMC’s] resolve to achieve its price-stability goal or a judgment that inflation was already on a persistent downward path.”

In remarks on Friday, Fed Governor Lisa Cook noted that inflation in core services has “remained stubbornly high” but that many supply bottlenecks and shortages have abated. Cook noted, however, that the labor market still remains too tight.

“The pandemic has had a much more prolonged effect on labor supply than many expected, and rapid nominal wage growth has accompanied the recent rise in inflation in ways that traditional measures of labor market tightness — such as the unemployment rate gap — might not be capturing,” she said.

On Thursday, payroll company ADP found the U.S. economy gained 235,000 private sector jobs in December, about 90,000 jobs higher than many had forecast. Small businesses with fewer than 50 employees gained 195,000 jobs, while midsized companies with 50 to 499 employees picked up 191,000 jobs. Large companies with 500 and more employees meanwhile lost 151,000 jobs last month.

“The labor market is strong but fragmented, with hiring varying sharply by industry and establishment size,” Nela Richardson, chief economist at ADP, said in a statement. “Business segments that hired aggressively in the first half of 2022 have slowed hiring and in some cases cut jobs in the last month of the year.”

Experts noted the difference in various sectors last month. The ADP report showed that construction, education, health care, and professional and business services sectors picked up about 50,000 additional jobs each, while leisure and hospitality jumped by 123,000 jobs. But the transportation and trade sector dropped 24,000 jobs.

“The labor market was still tight at the end of 2022, but the quality of jobs available to American workers has decline,” Bill Adams, chief economist at Comerica Bank, said. “Tech, finance, and manufacturing employers are laying off workers, while hiring continues in lower-paying industries like leisure and hospitality.”

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