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Equity Markets Open in Red as Wage Growth Stokes Rate Hike Fears

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US job additions

The Bureau of Labor Statistics released US (IVV) employment data for August today. After disappointing data in July, job additions in August rebounded to 201,000 as compared to economists’ expectations of 191,000 and last month’s additions of 147,000. The figures for the last two months were, however, revised down. For June, additions were revised down to 208,000 from 248,000. For July, the count was revised down by 10,000 to 147,000.

The unemployment rate came in unchanged at 3.9%, which was slightly higher than consensus expectations of 3.8%. Unemployment still remained at a multiyear low.

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Wage growth reaches post-recession high

The most awaited piece of the employment situation, wage growth, didn’t disappoint economists this time. The slower rate of growth in wages despite the economy running at near full employment has puzzled market participants and the Fed alike. For August, however, the average hourly earnings saw growth of 2.9% on an annualized basis, which is the highest since June 2009. It surpassed economists’ expectations of a sequential rise of 0.2% and annual growth of 2.7%.

The strong wage growth, however, adds to concerns that inflationary pressure could build up, which could encourage the Fed to adopt a more aggressive approach towards the rate hike. Rate hike prospects weigh negatively on equities.

Equity markets’ reaction

Rate hike fears were the reason that the US equity markets fell sharply in February when January wage growth data was released. The annualized wage growth came in at a post-recession high (the number was later revised downward). At the opening today, the S&P 500 (SPY), the Dow Jones Industrial Average (DIA), and the NASDAQ Composite (QQQ) were trading down by 0.36%, 0.30%, and 0.45%, respectively.

While a September rate hike (TLT) is almost a given, the data for the US economy is important for the decision regarding a fourth rate hike in 2018 and the path going forward.

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