Friday's Market Minute: The Labor Market Report Might Shift Attention Towards Wage Growth

It appears Congress has successfully managed to kick the debt limit can down the road again as a theatrical agreement to extend the debt ceiling through early December was reached. This buys more time for policymakers to get their social and infrastructure packages together and is, at the very least, a temporary green light for risk appetite in equities.

The BLS will soon release the employment report for September and the consensus estimate is for 460,000 jobs added with the unemployment rate decreasing to 5.1%. In comparison, there were 235,000 jobs added in August and the unemployment rate is 5.2%. A figure more than consensus expectations, accompanied by a drop in the unemployment rate, has the capacity to bring forward market expectations of the first post-pandemic interest rate rise. It has the potential to put the Federal Reserve in the position where they may express concerns over wage inflation on top of all the other current inflationary factors.

There is a growing realization among policy officials that economies are nearer to full employment than previously thought and the supply disruptions caused by the pandemic will keep inflation higher for longer than previously expected. The recent rise in bond yields partly reflects concerns that port congestion, energy shortages, and the effects of coronavirus variants on workforce participation will mean that cost pressures may prove more permanent than transitory. Such concerns raise the risk that higher inflation may become a self-fulfilling prophecy by forcing businesses to prioritize pricing power over volume, and profits over market share by passing even higher costs on to end-users. Inflation is running well above the Fed’s 2% target, but employment is still well below levels before the pandemic. For the sake of perspective, there are currently about 5.3 million fewer jobs than in February 2020 (before the pandemic). Although Inflation usually lags an economic recovery, this cycle is unusual in the sense that inflation has essentially been front-loaded.

High inflation has resulted from a combination of an unprecedented shift to spending on goods over services during the pandemic, aggressive fiscal support, and pent-up demand after the reopening of the economy added to operational disruptions on global supply chains. From an investment standpoint, inflation in goods and services may manifest into higher wages as the labor market inches further towards full employment. Although the Fed is at least another year away from an actual rise in the Fed Funds rate, markets may remain on edge as the current market drawdown finds footing among the backdrop of rising wages, higher cost of capital, and slimmer profit margins.

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