On Wednesday, the Federal Reserve will increase interest rates once more. Will it, however, be another half-point increase or merely a quarter-point rise? What about the remaining months of the year?
The Fed’s further measures will largely depend on whether inflation is actually slowing down after this week’s meeting. The Friday release of the January jobs report will provide investors with yet another cue.
According to economists, 185,000 new jobs were created last month, which is a decline from the 223,000 and 263,000 positions added in December and November, respectively. The Fed would likely be pleased if the labour market continued to slow down since it would demonstrate that the rate increases from the previous year are successfully deflating the economy.
The Fed is aware of its precarious position. Gains in wages for workers are a contributing factor in inflation pressures. Employees have been able to demand significant salary increases to keep up with rising prices of consumer goods and services in an environment where the jobless rate is at a half-century low of 3.5%.
In keeping with this, it is anticipated that average hourly earnings, a measure of wages included in the monthly jobs report, will rise 4.3% from the previous year. This is a decrease from 5.1% in November and 4.6% in December.
Price growth slows down along with wage growth. Personal Consumption Price Index, or PCE, the Fed’s preferred inflation gauge, increased “only” 5% over the previous 12 months through December, as opposed to a 5.5% increase.
However, the Fed may need to keep raising interest rates until there is more proof that the labour market is cooling off sufficiently to cut inflation rates.
A soft landing or a recession?Additional job market indicators demonstrate that the US economy is not now in any major danger of entering a recession. Last week, 186,000 people filed weekly jobless claims, which is a nine-month low. On Thursday, investors will receive the most recent weekly initial claims figures.
This week, the Department of Labor’s Job Openings and Labor Turnover Survey (JOLTS) and payroll processor ADP’s reports on private-sector job growth will both be eagerly watched by the market.
However, experts predict that wage growth will slow down even further, relieving some of the Fed’s pressure.
Tony Welch, chief investment officer of wealth management company SignatureFD, stated in a research that “wage growth has been on a declining trajectory, and we think that weaker wage growth will be a pattern in 2023 as employment available diminish.”
Not everybody concurs with that conclusion. In the recent past, the transportation sector has seen more wage increases won by organised workers. Additionally, more employees of large IT and retail companies have recently joined unions.
Workers will be reluctant to give up the bargaining power they believe they have acquired over the previous year, according to a report by Jason Vaillancourt, a global macro strategist at Putnam.
Vaillancourt also brought up the fact that many consumers still have plenty of money stashed away from the early phases of the pandemic. That may indicate that inflation won’t be ending soon.
Furthermore, despite the possibility that the rate of job creation is slowing, economists are not yet forecasting monthly job losses, as they did for the US during prior recessions.
The Fed will be kept up at night if a healthy labour market is combined with a still sizable surplus savings balance, according to Vaillancourt.
Therefore, as long as there is optimism about a “soft landing” in the economy, the Fed will have to continue to be concerned about high inflation. This raises the possibility that the Fed may raise rates excessively, which would trigger a recession.
Technology on fireWall Street is unmistakably supporting the “soft landing” thesis. Just take a look at how well the tech sector has performed so far this year, despite several high-profile layoff announcements from leading Silicon Valley firms in recent months.
The Nasdaq is on course to have its greatest monthly performance since July with an 11% gain so far in January.
Some claim that additional IT job losses won’t cause an issue. Investors appear to (inadvertently) have the belief that cost-cutting initiatives by businesses are favourable for profitability and that continued consumer spending will likely have no influence on revenue.
This month, it’s impossible to miss the trend of traders praising companies for eliminating jobs. You could assume that the customer is stressed given the number of company layoffs that make the news every evening. Not that much, perhaps. Demand is quite reasonable, as it turns out, according to a research by Ally Invest portfolio manager Frank Newman.
However, a continuation of the Nasdaq’s rise may be heavily reliant on how well a quartet of tech titans do when they release their fourth quarter profits the next week: Apple (AAPL), Amazon (AMZN), Alphabet (GOOGL), Facebook and Instagram owner Meta Platforms, and Apple (AMZN).
Daniel Berkowitz, senior investment officer with investment manager Prudent Management Associates, wrote in a study that “a set of considerably weaker-than-expected reports from these firms might undermine the market’s robust start to 2023.”
With Microsoft (MSFT), Intel (INTC), and IBM (IBM) all posting disappointing numbers, the tech earnings season is not off to a very promising start. However, it’s crucial to keep in mind that those three belong to the “old tech” generation, while Apple, Amazon, Alphabet, and Meta all have more quickly expanding business.