Stocks fall after gains for worker wages fan inflation fears

Financial Markets Wall Street
The New York Stock Exchange is seen in New York, Thursday, Feb. 24, 2022. Markets are opening mostly higher on Wall Street Friday after a wild ride a day earlier. The S&P 500 added 0.4% in the early going, following even bigger gains in Europe.
(AP Photo/Seth Wenig)

Worries about inflation are hitting Wall Street Friday after a report showed wages for U.S. workers are accelerating, which is good news for them but could feed into even higher inflation for the nation.

The S&P 500 was 1% lower in early trading, on track to wipe out most of what had been a healthy week of gains. The Dow Jones Industrial Average was down 281 points, or 0.8%, at 34,112, as of 9:42 a.m. Eastern time, while the Nasdaq composite was 1.2% lower.

Stocks had been on the upswing for more than a month on hopes that the worst of the nation’s high inflation may have passed already. That fed expectations for the Federal Reserve to ease up on its fusillade of big interest-rate hikes, which are supposed to undercut inflation by slowing the economy and dragging down on prices of stocks and other investments.

But Friday’s jobs report showed that wages for workers rose 5.1% last month from a year earlier. That’s an acceleration from October’s 4.9% gain and easily topped economists’ expectations for a slowdown.

Such jumps in pay are helpful to workers who are struggling to keep up with higher prices for daily necessities. But the Federal Reserve worries too-strong gains could cause inflation to become further entrenched in the economy. That’s because wages make up a big part of costs for companies in services industries, and they could end up raising their own prices further to cover higher wages for their employees.

Across the economy, employers also added 263,000 jobs last month. That was stronger hiring than economists’ forecasts for 200,000, while the unemployment rate held steady at 3.7%.

“The most important number for the Fed is probably the wage number,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments.

Many traders are still betting on the Fed to downshift the size of its rate hikes at its next meeting later this month, to half a percentage point from the three-quarters of a point it had shoved through for four straight meetings.

But Treasury yields still jumped immediately after the jobs report’s release. That indicates strengthened expectations for the Fed to stay resolute in hiking interest rates to get inflation under control.

The yield on the two-year Treasury jumped to 4.34% from 4.24% late Thursday. The 10-year yield, which helps set rates for mortgages and many other loans, rose to 3.56% from 3.51%.

“Another month with a strong jobs report and torrid wage gains is a reality check for where we stand in the inflation fight,” said Mike Loewengart, head of model portfolio construction at Morgan Stanley Global Investment Office.

The strong jobs data follows up on several mixed reports on the economy. The nation’s manufacturing activity shrank last month for the first time in 30 months, for example, while the housing industry is struggling under the weight of much higher mortgage rates.

That’s largely by design, because the Fed is raising interest rates as a way of slowing the economy just enough to starve inflation in the prices of things that households and businesses need to stay alive. But the rate hikes also risk causing a recession if they go too far. A jobs market that remains much stronger than expected could make an already dicey situation for the Fed even more complicated.

More economists are forecasting the U.S. economy to fall into a recession next year in large part because of higher interest rates.

“While the Fed won’t back away from” a hike of just half a percentage point “in December, they still have no clue what they’ll do in 2023,” said Allpsring’s Jacobsen.