Strong Jobs Report Revives Fears of Inflation and More Aggressive Fed

Signage for a job fair is seen on 5th Avenue in New York City, on Sept. 3, 2021. Andrew Kelly/Reuters

Positive jobs reports can be bad news for the market.

The latest strong jobs report, for example, revived Wall Street fears of continued inflation and a more aggressive Federal Reserve as markets were volatile on the news.

Stocks opened lower following the jobs report from the U.S. Bureau of Labor Statistics, with a brief rally by late morning, which was lost by early afternoon.

The U.S. jobs market exceeded expectations, adding more 517,000 jobs in January, with the unemployment rate falling to 3.4 percent, the lowest since May 1969, according to data from the report.

Economists were expecting 185,000 jobs would be added last month, based on consensus estimates from Refinitiv.

Meanwhile, many investors remain skittish as fears of a persistently growing economy could give the Fed more reason to hike rates.

Fed May Need to Step Up in Inflation Battle

The Fed has been trying to slow down the American economy to combat historically high inflation since March 2022.

“Even as the latest wage data look consistent with cooling inflation, when the economy is running this hot (and the January number is lit), it becomes a bit harder to feel confident that inflation will continue gliding downward,” commented Justin Wolfers, an economist, in a tweet.

Although policymakers have been recently successful at slowing growth to weaken inflation, the tight U.S. labor market has kept demand for workers and job openings at high, despite a wave of recent layoffs, particularly in the tech sector and media.

Investors are now beginning to realize that the labor market will remain fairly robust for weeks to come and that employers will continue to hire.

The jobs cuts in recent months at Big Tech were seen by some as the start of a wave of layoffs in the wider economy, but it does not appear to be the case, Giacomo Santangelo, an economist at Monster, told CNN.

Jobless claims have remained historically low, while openings remain consistent and job gains remain strong,

“The news is talking about big names laying off, but we don’t really hear what happens at small firms with less than 200 employees,” said Santangelo.

“What we’re seeing at Monster is a lot of firms, a majority of firms, are looking to hire.”

Furthermore, wages are continuing to rise, which will add to more inflation pressures and justify additional rate hikes from the Fed.

Strong Job Report Leaves Investors Uncertain

Meanwhile, average hourly earnings increased 4.4 percent year over year last month, for the slowest growth rate since August 2021, as gains fell behind inflation price growth.

“This is the 22nd consecutive month where inflation outpaced the growth in wages (year over year), a decline in prosperity for the American worker and the primary reason why the Fed will hike again,” stated market strategist Charlie Bilello in a tweet.

Stocks continued to sell off on the news, with Alphabet down 3 percent, while Amazon tumbled 9.49 percent, but Apple saw a rebound with shares gaining 3 percent, despite lackluster results.

However, investors remain optimistic due to signs of falling inflation, along with comments from Federal Reserve Chairman Jerome Powell saying that the disinflationary process has begun.

Other economists, such as Mohamed El-Erian, who wanted the Fed to raise the benchmark rate to 50 basis points this week are not as optimistic.

“Services are booming. So we’re getting the goods disinflation which is going to stop at some stage, you know. Prices can’t go down forever, that’s going to stop,” El-Erian told Bloomberg.

“We have services inflation where the balance of risk is on the upside, and these are less sensitive to the interest rate tool. So when I look at that, I worry a little bit that we may be too optimistic about the path for future inflation and therefore I would have corrected the understanding of the market,” he added.

The Dow Jones industrial Average rose more than 125 points just before noon, but fell 127.93, or 0.38 percent, by the end of the trading day, to end at 33,926.01.

The S&P 500 Index closed down 43.28, or 1.04 percent, while the Nasdaq dropped 193.86, or 1.59 percent.