Last week markets reacted strongly to the unemployment report, but why and will the fall continue?
The jobs report carried plenty of good data for January. Non-farm payrolls grew by 200K, the participation rate remained unchanged, the unemployment rate held steady at 4.1%, and wage growth came in at 2.9% year over year. This marked a strong acceleration. Great news for discretionary spending. This also speaks to the strength of the current expansion.
There was a bomb hidden within the employment report, however, that caused the markets to start a sell off that has not been seen for two years. With the rise in wages, the consumer becomes stronger. A stronger consumer means that demand will likely outpace production of goods. In this scenario, we get true inflation.
This is something that the Federal Reserve Board (FRB) has been waiting for. The FRB has a dual mandate of full employment and inflation at 2%. They have been looking for reasons to raise rates the last two years, but this move in wage growth likely seals the deal for an increased pace of rate increases.
Luckily, market reaction is interested in the likelihood of a tightening FRB but not what is good for the long term wellbeing of the economy. This wage increase actually represents strength in the economy rather than risk. In the short-term, volatility is likely to continue; in the long term, however, the health of the expansion will bring buyers back to the table.
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