Fed’s Grip on Markets Thrusts Secondary Wage Data Into Spotlight

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Fed’s Grip on Markets Thrusts Secondary Wage Data Into Spotlight
Credit: © Reuters.

(Bloomberg) -- Even as reams of corporate earnings pour in, the Federal Reserve and its intentions for interest-rate policy still dominate sentiment on Wall Street.

Take Tuesday, when a report on wages that usually garners scant attention jolted stock futures higher and sent bond yields sliding. The Bureau of Labor Statistics’ employment cost index came in below estimates, headlining virtually every research note on a day when the likes of Exxon Mobil Corp (NYSE: XOM ). and Caterpillar Inc (NYSE: CAT ). delivered comments on their expectations for the year.

It’s an unlikely star turn for a report the market usually pays scant attention to. Normally, the hourly wages component of the Labor Department’s monthly jobs report captivates investors. But with January’s hiring data not due until after the Fed renders its policy decision Wednesday, the BLS report dominated macro sentiment.

“It’s one of those data points that doesn’t really matter until it does,” said Shawn Cruz, head trading strategist at TD Ameritrade. “The market wants the Fed to get the sense that inflationary pressures are abating and that things are starting to slow down. That is what this report would indicate.”

US employment costs rose at a slower-than-expected pace in the closing months of 2022, with the employment cost index — a broad gauge of wages and benefits — advancing 1% in the fourth quarter. The number has suddenly gained influence as investors try to suss out how the Federal Reserve will proceed on its path of interest-rate hikes. 

“Everyone is holding their breath for Jay Powell’s next move,” said Mike Bailey, director of research at FBB Capital Partners. “Powell has probably made up his mind already, but investors have some last-minute agita for this type of inflation data.”

US stocks rose, with the S&P 500 advancing 0.6% as of 10:44 a.m. in New York, and the Nasdaq 100 adding 0.8%. The S&P is on pace for a more than 5% gain in January. 

The ECI print is “considered a gold standard data point on employment costs,” said Dennis DeBusschere, founder of 22V Research. “This is good news and should embolden the doves on the FOMC.”

Economists expect the Fed to raise rates by a quarter-point Wednesday, which would mark its eighth consecutive increase and the smallest in almost a year. Fed Chair Jerome Powell has continued to push back against traders anticipating rate cuts this year, emphasizing the need to keep rates elevated until inflation has eased meaningfully.

Still, FBB’s Bailey says “only a massive outlier” could at this point sway the central bank’s decision this late in the game. “The cooler ECI print is a nice to have for markets, but the real punchline is that the Fed is following the bond market down a path of less painful rate hikes,” said Bailey. 

(Updates prices throughout; adds Cruz comment.)

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