Weekly Market Update: January 16, 2023

The nation added an estimated 223,000 jobs during the final month of 2022. That figure was down from the previous month’s revised tally of 256,000, but above the consensus forecast and yet another sign that labor market conditions remain tight. The December gains pushed the 2022 estimated 12-month jobs creation figure above the 4.5 million mark. The unemployment rate fell from 3.7% to 3.5% last month.

There were parts of the Labor Department report that had to please the Federal Reserve. Specifically, the average hourly wage climbed just 0.3% last month and was up 4.6% over the last 12 months. The latter figure was down from the 5.0% increase recorded in November and suggests that the Fed’s goal to slow wage growth in an effort to fight inflation is starting to materialize. It also is worth noting that the labor force participation rate rose to 62.3%, which means more people are looking for work, and the expanded pool of job searchers may put further downward pressure on wages.

Nevertheless, Federal Reserve officials noted that more work needs to be done on the inflation front. This would include pushing the federal funds rate above the 5.00% mark and keeping it there for an extended period to effectively fight inflation. Wall Street may not be lock-step in such thinking and believes that inflation is moderating and more benign future pricing data will cause the central bank to pause on the rate-hike front later this year. Hence, the drop in Treasury market yields and notable equity market rally in the session following the December labor report.

Meantime, the U.S. economy is showing signs of weakening despite the still-solid job creation. According to the Institute for Supply Management, a trade group, manufacturing activity contracted for the second straight month in December. Likewise, non manufacturing (services) activity declined to 49.6 last month, well below the market forecast of 55, and the first contraction in the services sector since May 2020.

Conclusion: The inflation situation appears to be improving, but for the Fed to see its job of stabilizing prices as done, tight money may continue long enough to potentially come at the near-term expense of the economy and corporate earnings.