Jobs report to give further clues about where economy is headed

(CNN) — The Federal Reserve is going to raise interest rates again on Wednesday. But will it be another half-point hike or just a quarter-point increase? And what about the rest of the year?

The Fed’s actions beyond this week’s meeting will depend primarily on whether inflation is truly slowing. Investors will get another clue when the January jobs report is released on Friday.

Economists predict that 185,000 jobs were added last month, a slowdown from the gain of 223,000 jobs in December and 263,000 in November. A further deceleration in the labor market would likely please the Fed, as it would show that last year’s rate hikes are successfully taking some air out of the economy.

The Fed knows it’s in a tough situation. Inflation pressures are partly fueled by wage gains for workers. In an environment where the unemployment rate is at a half-century low of 3.5%, employees have been able to command big increases in pay to keep up with rising prices of consumer goods and services.

Along those lines, average hourly earnings, a measure of wages that is also part of the monthly jobs report, are expected to increase 4.3% year-over year. That’s down from 4.6% in December and 5.1% in November.

As wage growth cools, so do price increases. The Fed’s favorite measure of inflation — the Personal Consumption Price Index or PCE — rose “just” 5% over the past 12 months through last December, compared to a 5.5% annual increase in November.

That is still uncomfortably high, but the trend is moving in the right direction.

The problem for the Fed, though, is that it may need to keep raising interest rates until there is further evidence that the labor market is cooling off enough to push the rate of inflation even lower.

Recession or soft landing?

Several other job market indicators continue to show that the US economy is in no serious danger of a recession just yet. The number of people filing for weekly jobless claims dipped last week to 186,000, a nine-month low. Investors will get the latest weekly initial claims numbers on Thursday.

The market will also be closely watching reports about private-sector job growth from payroll processor ADP and the Job Openings and Labor Turnover Survey (JOLTS) from the Department of Labor this week. The last JOLTS report showed that more jobs were available than expected in November.

Still, some expect that wage growth should continue to fall, which should take pressure off the Fed somewhat.

“Wage growth has been on a slowing trajectory, and we suspect that softer wage growth will be a trend in 2023 as jobs available contract,” said Tony Welch, chief investment officer at SignatureFD, a wealth management firm, in a report.

Not everyone agrees with that assessment. Organized labor has been winning bigger pay increases lately in the transportation industry. And more workers at tech and retail giants have been unionizing as of late.

“Workers will be loath to relinquish the bargaining power they perceive to have gained over the past year,” said Jason Vaillancourt, global macro strategist at Putnam, in a report.

Vaillancourt also pointed out that many consumers are still flush with cash that they saved up during the early stages of the pandemic. That could mean that inflation isn’t going away anytime soon.

And even though the pace of jobs gains may be slowing, it’s not as if economists are starting to predict monthly job losses like the US has had in previous recessions.

“Combine a strong labor market with a still substantial reserve of excess savings, and you have all the components in place to keep the Fed up at night,” Vaillancourt said.

So as long as hopes for an economic “soft landing” persist, the Fed will have to keep worrying that inflation is too high. That increases the chances the Fed could go too far with rate hikes and ultimately lead to a recession.

Techs on a tear

Wall Street is clearly buying into the “soft landing” argument. Just look at how well tech stocks have done so far this year, despite a series of high-profile layoff announcements from top Silicon Valley companies in the past few months.

The Nasdaq is up 11% so far in January, putting it on track for its best monthly performance since July.

Some argue that more tech layoffs won’t be a problem. Investors seem to be (somewhat perversely) taking the view that companies cutting costs is a good thing for profits and that revenue likely won’t be impacted in a negative way because consumers are still spending.

“A theme that can’t go unnoticed this month is how traders are rewarding firms for cutting jobs. With corporate layoffs making headlines each evening, you might think the consumer is strained. Maybe not so much. It turns out that demand is decent,” said Frank Newman, portfolio manager at Ally Invest, in a report.

But a continuation of the Nasdaq’s surge may depend a lot on how well a quartet of tech leaders do when they report fourth quarter earnings next week: Facebook and Instagram owner Meta Platforms, Apple, Google owner Alphabet and Amazon.

“A set of much weaker-than-expected reports from these firms could dent the market’s strong start to 2023,” said Daniel Berkowitz, senior investment officer for investment manager Prudent Management Associates, in a report.

So far, tech earnings season is not off to an inspiring start, with Microsoft, Intel and IBM all reporting weak results. But it’s important to note that that trio is part of the “old tech” guard while Apple, Amazon, Alphabet and Meta all have more rapidly growing businesses.

Tesla reported strong results last week, which could be a sign of good things to come from other more dynamic tech companies.

Jobs and what’s next

Monday: IMF releases world outlook; earnings from Philips, GE Healthcare, Franklin Resources, SoFi, Ryanair, Whirlpool and Principal Financial

Tuesday: China official PMI; Europe GDP; US employment cost index; US consumer confidence; earnings from Exxon Mobil, Samsung, GM, Phillips 66, Marathon Petroleum, UPS, Pfizer, Sysco, Caterpillar, UBS, McDonald’s, Spotify, Mondelez, Amgen, AMD, Electronic Arts, Snap and Match

Wednesday: Fed meeting; US ADP private sector jobs; US JOLTS; China Caixin PMI; Europe inflation; earnings from AmerisourceBergen, Humana, T-Mobile, Novartis, Altria, Peloton, Meta Platforms, McKesson, MetLife and AllState

Thursday: US weekly jobless claims; US productivity; BOE meeting; ECB meting; Germany trade data; earnings from Cardinal Health, ConocoPhillips, Merck, Bristol-Myers, Honeywell, Eli Lilly, Stanley Black & Decker, Hershey, Sirius XM, Penn Entertainment, Ferrari, Harley-Davidson, Apple, Amazon, Alphabet, Ford, Qualcomm, Starbucks, Gilead Sciences, Hartford Financial, Clorox and WWE

Friday: US jobs report; US ISM non-manufacturing (services) index; earnings from Cigna, Sanofi, LyondellBasell and Regeneron

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