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Could December’s Wage Growth Spook the Already Volatile Markets?

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Wage growth in December

Wage growth will likely be the most closely watched component of the US (VOO) jobs report. While the other components of the jobs report have shown a firm labor market, wage growth has been a missing piece for a while. While wage growth had disappointed market participants for the last few months, November’s wage growth was more or less in-line with expectations. Wage growth usually signals inflation pressure in the economy.

Inflation is one of the key data pieces for the Fed to consider along with full employment levels while deciding rate hikes.

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Wage growth expectations

Economists expect the wage growth momentum to continue but are estimating slight ease in wage growth to 3.0% YoY in December as compared to 3.1% growth in November. This estimate is as per the consensus compiled by Bloomberg. This estimate should be a sweet spot for the markets. Faster acceleration in wage growth could fuel markets’ fear of increased Fed rate hikes.

Wage growth and the economy

Currently, the economic and job market conditions support strong wage growth expectations. However, hotter-than-expected wage numbers could drive the market into a selling frenzy. Higher wage growth would mean tightening inflation (TIP) pressure, which could encourage the Fed to remain on the rate hike (AGG) path and be even more aggressive about it.

The markets have already been quite wary of the rising interest rate environment. As we highlighted in Does the Sell-Off Imply Market Repositioning for Lower Growth, US markets (SPY) (DIA) saw sell-offs, as rising bond yields and signs of firming inflation have spooked investors.

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