Wage Growth Could Catch the Job Market’s Strong Fundamentals



Wage growth in January

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 hasn’t consistently gone in the right direction. Wage growth has disappointed market participants in the last few months. However, January’s wage growth beat economists’ expectations. Wage growth usually signals inflation pressure in the economy.

Inflation is one of the key data pieces that the Fed considers, along with full employment levels, when making a decision about rate hikes.

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Wage growth expectations

Economists expect the wage growth momentum to continue as the unemployment rate remains at multidecade lows. The expectation is for January’s wage growth to come in at 3.2% YoY in January—the same as December. The month-over-month rise in wages is expected to be 0.3%, which is lower than the rise of 0.4% in December.

Wage growth and the economy

Currently, economic and job market conditions support strong wage growth expectations. However, hotter-than-expected wage numbers could lead to weakness in the equity markets. While the Fed has turned slightly dovish, it still depends on data. Higher wage growth would mean tighter inflation (TIP) pressure, which could encourage the Fed to remain on the rate hike (AGG) path.

The markets have already been 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. Rising bond yields and signs of firming inflation have spooked investors.


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