Stock Market Investors Are Uneasy About Wage Data In The June Jobs Report

Investors analyzed the mixed signals in the U.S. June employment report on Friday, grappling with wage gains that offset any relief from a slowdown in job growth.

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While a robust labor market signifies a resilient economy, which typically bodes well for the stock market, investors remain concerned about the impact on inflation. Despite a healthy increase of 209,000 nonfarm payrolls in June, slightly below expectations, investors were cautious due to a drop in the unemployment rate to 3.6% and a higher-than-expected 0.4% monthly rise in average hourly earnings, resulting in a 4.4% year-over-year wage increase. This growth in wages, up from around 3% pre-pandemic, is viewed as problematic by some economists.

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Ian Shepherdson, chief economist at Pantheon Macroeconomics, acknowledged the noise in the data and its potential for revision but noted policymakers' concern with the recent trend and the potential for further interest rate hikes. However, a survey of small-business owners suggested slower growth in the second half of the year.

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Jason Pride, chief of investment strategy and research at Glenmede, pointed out that the Federal Reserve may be disappointed that the report did not provide additional relief on core service sector inflation, as wages are a key driver in this area.

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The U.S. dollar declined in response to the report, with the ICE U.S. Dollar Index dropping 0.9%. Fed-funds traders have priced in a high probability of a 25 basis points rate increase at the central bank's upcoming meeting.

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While the jobs report indicates a job market moving in the desired direction for the Federal Reserve, with a bit more slack but still signs of tightness, it is unlikely to sway the Fed from its plan of a rate hike at the next meeting. However, investors should consider that this report is just one data point and subject to significant revisions, and thus, not the sole factor guiding the Fed's decisions.

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