Stocks fell this morning in response to a big jobs report “beat.” Nonfarm payrolls increased by 263,000 last month, easily surpassing the 200,000 job estimate.
“To have 263,000 jobs added even after policy rates have been raised by some [375] basis points is no joke,” explained Seema Shah, chief global strategist at Principal Asset Management.
“The labor market is hot, hot, hot, heaping pressure on the Fed to continue raising policy rates.”
Despite beating expectations, November’s job gain was the worst since December 2020. That took much of the bearish sting off the headline payroll data, but the most important portion of the report concerned rising wages.
Hourly pay was up 0.6% month-over-month in November, doubling the estimate (+0.3%) as wages grew 5.1% annually vs. +4.6% expected. This was a particularly troubling stat considering that Fed Chairman Jerome Powell addressed wages directly in his Wednesday speech that drove equities through the roof.
“To be clear, strong wage growth is a good thing. But for wage growth to be sustainable, it needs to be consistent with 2 percent inflation,” Powell said.
5.1% year-over-year wage growth is by all means not consistent with 2 percent inflation.
Powell said Wednesday that the Fed would start decreasing the size of its rate hikes this month.
Bulls obviously loved that. They also ignored Powell’s warning that “despite some promising developments, we have a long way to go in restoring price stability.”
It’s unlikely that Powell intended his speech to be so dovish. When this sort of misinterpretation by investors happens, Fed officials often deliver hawkish remarks in the days that follow.
Do not be surprised at all if Fed governors use last month’s wage data as an excuse to go “full hawk” early next week to bring stocks lower.
“While the headline payrolls number was strong, the wage data is going to be eye-popping for the Fed. The 0.6% month-over-month wage growth number matched the highest level all year,” said Cornerstone Financial’s Cliff Hodge.
“Higher wages feed into higher inflation, which will no doubt keep pressure on the Fed and should increase expectations for the terminal rate. We got no help from the participation rate, which continues to move in the wrong direction and will keep competition for labor high until the economy inevitably rolls over sometime next year.”
The result of rising wages (ie, rising inflation) and slowed growth will be stagflation at some point in 2023. Shorter-term, though, wages have the potential to shock the Fed into a higher terminal rate at its December meeting.
November’s FOMC minutes revealed that many Fed officials believed wage inflation was cooling quickly. That’s obviously not the case, and this morning’s revelation could have a hawkish impact on the Fed’s next dot plot, due out this month.
The median rate for 2023 was 3.8% in June. The next dot plot released in September showed a median rate of 4.6% for 2023.
November’s wage data could easily push the median rate for next year above 5.0%.
And so, even if the Fed only raises rates by 50 basis points at its December FOMC meeting (December 14th), a higher median rate would undoubtedly hammer stocks lower, as it would imply that the pace of rate increases won’t slow as much as expected.
That’s bad news for bulls, and with stocks already up significantly off their October lows, it could be enough to ensure that the market misses its “Santa Rally” this year prior to a longer-term bear market continuation in anticipation of a grim H1 2023.
