Cooling Off

Mike Zaccardi

LAST FRIDAY’S U.S. JOBS report was just what the doctor ordered. While much attention gets paid to the headline change in employment—which was a solid 223,000 gain in December—the bullish news was in the report’s details.

Average hourly earnings, a key measure of wage growth, were up 4.6% from a year ago, significantly less than the 5% consensus expectation. Weekly hours worked were also a smidgen less than forecasted—another “cool” reading on the inflation front. The unemployment rate, meanwhile, fell to its lowest level since 1969. Stocks initially rose on the news Friday morning, but then fell flat shortly after the market opened.

So, what caused the S&P 500 to soar on Friday? The Institute for Supply Management (ISM) issues a manufacturing index and services index each month. While the manufacturing gauge has been indicating economic contraction for some time, the December services report released on Friday showed an unexpected dip below 50—the demarcation line between expansion and contraction. It was the biggest negative surprise for the services index since 2008. Within the ISM Services report, the employment, prices paid and new orders subindexes all deteriorated from the previous month.

That disappointing data will be welcome news at the Federal Reserve. The Fed’s policymakers remain fixated on taming inflation. After some “hot” employment readings earlier in the week, the soft wage growth data in December’s jobs report and the big services slowdown may allow the Fed to ease off the economic brake pedal in coming months—and that’s why investors bid up share prices on Friday.

But will the Fed scale back its inflation-fighting efforts? Next Thursday’s CPI report could be the final arbiter on whether a gentler 25-basis-point interest rate increase happens at the Federal Reserve meeting on Feb. 1—or whether a half-point rate hike is still in the cards.

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