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The Federal Reserve is set to raise interest rates again on Wednesday. But will it be another half-point hike or a quarter-point hike? And what about the rest of the year?
The Fed’s actions after this week’s meeting will largely depend on whether inflation really slows. On Friday, investors will have another clue when the January jobs report comes out.
Economists forecast 185,000 jobs were added last month. A further slowdown in the labor market could please the Fed, as it shows that last year’s rate hike is doing a good job of blowing the air out of the economy.
The Fed recognizes that the situation is tough. Inflationary pressure is partly driven by higher wages for workers. In an environment where the unemployment rate is at his 3.5% low in half a century, employees have been able to order significant pay increases to meet rising prices for consumer goods and services.
Along these lines, average hourly wages, a measure of wages that are also part of the monthly employment report, are expected to increase by 4.3% year-on-year. That’s down from his 4.6% in December and 5.1% in November.
As wage growth slows, so do prices. The Fed’s favorite measure of inflation, the Personal Consumer Price Index (PCE), rose “only” 5% in the past 12 months to December, compared with a 5.5% annualized rise in November.
It’s still uncomfortably high, but the trend is moving in the right direction.
The problem for the Fed, however, is that it may need to continue raising rates until it has further evidence that the labor market has cooled enough to lower inflation further.
Several other job market indicators continue to indicate that the US economy is not yet in danger of a deep recession. Weekly jobless claims fell to 186,000 last week, the lowest level in nine months. Investors will get the latest weekly initial claim numbers on Thursday.
The market is also keeping a close eye on private sector employment growth reports from payroll processor ADP and this week’s Jobs and Turnover Survey (JOLTS) from the Labor Department. His last JOLTS report showed that there were more job openings than expected in November.
Still, some expect wage growth to continue to slow, which should ease some of the pressure on the Fed.
Tony Welch, chief investment officer at asset management firm SignatureFD, said in a report that “wage growth is trending at a slowdown and will likely slow in 2023 as employment shrinks.” I think so,” he said.
Not everyone agrees with that assessment. The organized workforce has garnered greater pay increases in the transportation industry recently. And recently, workers at tech and retail giants have joined unions.
“Workers will be hesitant to let go of the bargaining power they perceive they have gained over the past year,” said Jason Vaijancourt, global macro strategist at Putnam, in a report.
Vaillancourt also noted that many consumers still have the cash they saved in the early stages of the pandemic. This could mean that inflation won’t go away anytime soon.
The pace of job growth may be slowing, but that doesn’t mean economists are starting to forecast monthly job losses, as the US experienced during previous recessions.
“Combining a strong labor market with a still substantial surplus of savings, we have all the ingredients in place to keep the Federal Reserve going overnight.”
So as long as expectations of a “soft landing” of the economy persist, the Fed should continue to worry about too high inflation. This makes it more likely that the Fed will raise rates too much, ultimately leading to a recession.
Wall Street clearly subscribes to the “soft landing” argument. Just look at how well tech stocks have performed this year so far, despite a string of high-profile layoff announcements from Silicon Valley’s top companies over the past few months.
The Nasdaq is up 11% so far in January, maintaining its best monthly performance since July.
Some argue that more tech layoffs are okay. Investors seem to think that it’s good for profits for companies to cut costs, and consumers are still spending, so it’s unlikely to have a negative impact on earnings.
“A theme to watch this month is how traders are rewarding companies that cut jobs. You might think so, maybe not so much, Ally Invest portfolio manager Frank Neumann said in a report that demand is modest.
But whether the Nasdaq’s surge continues could depend heavily on the performance of the four tech leaders who report their fourth-quarter results next week. Facebook and Instagram owners Meta Platforms, Apple (AAPL), Google owners Alphabet (GOOGL), and Amazon (AMZN).
“A strong start to the market in 2023 with a series of significantly lower-than-expected reports from these companies,” Daniel Berkowitz, senior investment officer at investment manager Prudent Management Associates, said in a report. could be ruined,” he said.
Microsoft (MSFT), Intel (INTC) and IBM (IBM) have all reported weak results, so far the tech earnings season hasn’t gotten off to an exciting start. But it’s important to note that while Apple, Amazon, Alphabet and Meta all have faster growing businesses, these three are part of the “old technology” guard. .
Tesla (TSLA) reported strong earnings last week.
Monday: IMF releases global outlook. Revenue from Philips (PHG), GE Healthcare, Franklin Resources (BEN), SoFi, Ryanair (RYAAY), Whirlpool (WHR), Principal Financial (PFG)
Tuesday: China Official PMI; European GDP; US Job Cost Index; US Consumer Confidence; UPS (UPS), Pfizer (PFE), Sysco (SYY), Caterpillar (CAT), UBS (UBS), McDonald’s (MCD), Spotify (SPOT), Mondelez (MDLZ), Amgen (AMGN), AMD (AMD), Electronic Arts (EA), Snap (SNAP), Match (MTCH)
Wednesday: Federal Reserve Board; Private Sector Work of US ADP; US shock; China Goods New PMI; European inflation; AmerisourceBergen (ABC), Humana (HUM), T-Mobile (TMUS), Novartis (NVS), Altria (MO), Peloton (PTON), Meta Platforms, McKesson ( MCK), MetLife (MET), revenue from AllState (ALL))
Thursday: US weekly unemployment claims. US productivity; BOE meeting; ECB meeting; German trade data; Cardinal Health (CAH), ConocoPhillips (COP), Merck (MRK), Bristol-Myers (BMY), Honeywell (HON), Eli Lilly ( LLY), Stanley Black & Decker (SWK), Hershey (HSY), Revenue from Sirius XM (SIRI), Penn Entertainment (PENN), Ferrari (RACE), Harley Davidson (HOG)n, Apple, Amazon, Alphabet , Ford (F), Qualcomm (QCOM), Starbucks (SBUX), Gilead Sciences (GILD), Hartford Financial (HIG), Clorox (CLX), WWE (WWE)
Friday: US Employment Report; US ISM Non-Manufacturing (Services) Index; Revenues from Cigna (CI), Sanofi (SNY), LyondellBasell (LYB), Regeneron (REGN)