Over the past couple of years, employment data in the U.S., which is reported monthly, has been remarkably consistent. Employers add jobs at a fairly rapid clip, the unemployment rate remains low and wage growth is tepid. The steadiness of the data is consistent with the slow and steady economic recovery that has taken place since the financial crisis. This has allowed the Federal Reserve to be very judicious with their pace of monetary policy tightening, meaning, they can raise rates at a gradual pace without fear of an overheating labor market or overheating inflation. Good for bond investors, good for stock investors, good for everyone.
This story received a jolt in January when wage growth was reported to have risen by 0.3% month/month and 2.9% year/year, the fastest pace since 2009. Investors interpreted this to mean that labor markets were tightening at an accelerating pace, which would inevitably drive inflation higher. Market reaction was volatile, as both bonds and stocks sold-off in anticipation of the Federal Reserve needing to raise rates at a more rapid clip than they, or market participants, were anticipating. The common analogy for this is known as “taking away the punchbowl,” which can portend negative price action for bond investors, for stock investors, for everyone.
Last month’s data, which was released last Friday, should alleviate concern however as the numbers normalized to a more standard pace. Employers added 313k jobs during February, the unemployment rate was reported at 4.2% and wage growth was 0.1% versus January and 2.6% versus a year ago. Stocks rose and bonds fell slightly on the news. We’ll see how the Fed reacts to the report in their upcoming meeting on the 21st. Not only will we hear from newly appointed Fed Chair Jerome Powell in a post-meeting press conference, we will also see projections on the number of rate hikes the Fed anticipates making this year, and even more importantly, next year. So for now, everyone can sit tight, and wait to see not only how the data evolves, but also how the Fed reacts.