Higher wages can cause companies to raise prices for their own products to sustain profits, which can lead to something economists call a “wage-price spiral.”
To be sure, some market watchers also pointed to numbers within Friday’s employment report suggesting the jobs market may not be as strong as the overall numbers imply. The number of people with multiple jobs rose by more than half a million, for example, said Brian Jacobsen, senior investment strategist at Allspring Global Investments.
“That was mostly from people who already have a full-time job and then the second job is part-time,” he said. “Maybe this is more superficially impressive than substantively impressive.”
Wall Street’s clearest moves came from the bond market, where Treasury yields shot higher immediately after the release of the jobs data. The two-year Treasury yield, which tends to track expectations for Fed action, jumped to 3.23 per cent from 3.05 per cent late Thursday. The 10-year yield, which influences rates on mortgages, rose to 2.84 per cent from 2.69 per cent.
Wall Street is coming off the best month for stocks since late 2020, a rally driven mostly by what had been falling yields across the bond market. The hope on Wall Street had been that the economy was slowing enough to get the Fed to ease up on its rate hikes.
Higher mortgage rates had cut into the housing industry, in particular, after the Fed raised its short-term rates four times this year. The last two increases were triple the usual size, and the Fed has raised its benchmark overnight rate from nearly zero by 2.25 percentage points.
“Today’s print, coming in much stronger than anticipated, complicates the job” of the Federal Reserve, Rick Rieder, BlackRock’s chief investment officer of global fixed income, said in a statement. He said the assumption now becomes the Fed raising short-term rates by another 0.75 percentage points next month, unless next week’s highly anticipated report on inflation “shows some dramatic weakness, which seems highly unlikely at this point.”
Traders scrambled to place bets for bigger hikes coming out of the Fed’s next meeting. They have flipped their expectations from a day earlier and now largely expect the Fed to hike by 0.75 percentage points, instead of by half a point.
Such increases hurt investment prices in the near term, and they raise the risk of recession further down the line because they slow the economy by design.
Such expectations also mean the two-year Treasury yield remains above the 10-year yield. That’s unusual, and some investors see it as a sign of a recession hitting the economy within the next year or two.
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On Friday, Warner Bros. Discovery fell 16.5 per cent for the biggest loss in the S&P 500 after reporting weaker results for the latest quarter than analysts expected. Monster Beverage lost 5.2 per cent after it reported weaker profit than expected, though its revenue was stronger than forecast.
Smaller company stocks also weathered the turbulent trading to notch gains. The Russell 2000 index rose 15.37 points, or 0.8 per cent, to close at 1,921.82.
In overseas stock markets, India’s Sensex rose 0.2 per cent after the Reserve Bank of India raised its benchmark interest rate by a half percentage point to 5.4 per cent.
Japan’s Nikkei 225 rose 0.9 per cent, while Germany’s DAX fell 0.6 per cent.