Morning Report: Wage growth is decelerating

Vital Statistics:

S&P futures3,868 39.75
Oil (WTI)73.960.18
10 year government bond yield 3.73%
30 year fixed rate mortgage 6.48%

Stocks are higher this morning after the jobs report gave some positive news on inflation. Bonds and MBS are up.

The economy added 223,000 jobs in December, which was a touch above consensus, while the unemployment rate ticked down to 3.5%. The labor force participation rate increased to 62.3%.

The part that caught the market’s attention was the change in average hourly earnings, which came in lower than expected. The Street was looking for a 0.4% MOM increase and got 0.3%. The YOY increase came in at 4.6% versus the 5.1% forecast.

Rising wages is the biggest concern of the Fed as it is trying to avoid the wage-price spiral which was a big contributor to 1970s inflation (amongst other things). Where would the Fed like to see wage growth? That is a harder guess. If wage growth falls to 2%, where the Fed would like to see inflation, there is no real wage growth and that is probably too low. My guess is that the 3.5% or so would be the Goldilocks scenario, provided that inflation falls back to the 2% target. A big component of this will be productivity growth, which has been muted.

Total multifamily and commercial borrowing is expected to fall 5% in 2023, according to the MBA. “The typical FOMC member’s expectations for the federal funds rate at the end of 2023 increased throughout 2022, jumping from 1.6 percent to 5.1 percent as of December 2022,” said Jamie Woodwell, MBA’s Head of Commercial Real Estate Research. “Those shifts in outlook from the Federal Reserve are both a response to changing economic conditions and a cause of change themselves. Commercial real estate markets are not immune to these shifts, and we expect borrowing and lending backed by commercial and multifamily properties to decline again this year. Uncertainty and volatility around the paths of the economy, interest rates, and property valuations will likely continue to cause instability for commercial real estate markets well into this year.”

More evidence that the Fed is gaining traction on slowing the economy: The services PMI contracted in December, falling from 56.5% to 49.6%, which is a big decrease. This is the first time the services economy contracted since the early days of the pandemic when everyone was locked down.

Inventory has gone from “too low” to “too high” indicating that the supply chain issues are largely over, and that Q4 GDP will probably be goosed from inventory build, which represents “borrowed” growth from Q1 this year.


Author: Brent Nyitray

In the physical sciences, knowledge is cumulative. In the financial markets, it is cyclical

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