The United States announced on Friday (7th) that the December non-agricultural employment report was far worse than expected, and the unemployment rate hit a record low since February 2020. This report of strong salary growth and continued inflationary pressures prompted a fall in gold and a surge in U.S. Treasury yields. , US stocks continued to fall. Many economists believe that when wage inflation is coming and the threshold for the Federal Reserve to raise interest rates has been reached, Chairman Bauer will have to walk on the tightrope.
Non-agricultural employment report in December:
- New non-agricultural employment was reported to 199,000 people, which is expected to be 400,000. The previous value was revised up from 210,000 to 249,000
- Unemployment rate reported 3.9%, expected 4.1%, previous value 4.2%
- The average weekly working hours is 34.7 hours, the previous value was 34.8 hours
- The average hourly salary increase rate is reported at 4.7%, which is expected to be 4.2%, and the previous value is 4.8%
- Average hourly salary monthly increase rate reported 0.6%, which is expected to be 0.4%, the previous value was revised up from 0.3% to 0.4%
- The labor participation rate reported 61.9%, expected to be 61.9%, and the previous value was 61.8%
Non-agricultural data showed that the number of new non-agricultural employment was 199,000, which was far below the expected 400,000. The average hourly wage in December increased by 0.6%, which was higher than the expected 0.4%. The average hourly wage in November was also revised upwards. The unemployment rate (3.9%) fell more than expected, highlighting the tightening of the labor market.
Salary inflation is coming
Academy Securities analyst Peter Tchir said: “The most terrifying thing for the market is that the average hourly wage in November was revised up to 0.4% (up from the initial estimate of 0.3%), and it increased by 0.6% in December. Whether it is the former Federal Reserve Standard Both Ben Bernanke and Janet Yellen, chairmen of the conference, often see inflation as temporary, unless wages rise, which indicates that wage inflation is coming.”
However, Tchir pointed out that the 3.9% unemployment rate is not as good as it seems, and that the unemployment rate of disadvantaged minorities has not improved, and this is one of the focuses of the Fed’s close attention.
Threshold for interest rate hike has been reached
In order to curb deteriorating inflation, the Fed has had to move toward raising interest rates or even shrinking balance sheets this year. Greg Daco, an analyst at the Oxford Economics Institute, said that this latest report will make the Fed believe that as the economy makes progress towards maximizing employment, it is reasonable for the Fed to switch to hawkish policies.
Neil Dutta, head of US economics at Renaissance Macro Research, said that this report gave the green light for an interest rate hike in March, and the unemployment rate fell to 3.9%, 0.4 percentage points lower than the Federal Reserve’s estimate.
Bloomberg economist Carl Riccadonna said that there is no doubt that the biggest focus of this report is that the labor market has now reached the Federal Reserve’s estimate of full employment (below 4%), which means that this has reached the threshold for raising interest rates.
CME’s FedWatch tool shows that Fed funds futures investors predict that the Fed will raise interest rates for the first time in March 2022 with a 75% chance of raising interest rates for the entire year. The probability of raising interest rates four times throughout the year is slightly higher than that of three.
Omicron wave expected to hit non-agricultural January
The latest non-agricultural report is unlikely to reflect the impact of Omicron’s new crown variant, mainly because the investigation period ended in mid-December last year.
Michael Pearce, senior U.S. economist at Capital Macros, said: “Omicron spread quickly and caused chaos too late. It did not have much impact on the number of non-agricultural employment in December. However, a large number of people were told to quarantine, which may lead to 1 The number of non-agricultural employment fell sharply in June.”
Daco believes that due to the impact of the Omicron new crown virus variant, he predicts that the overall employment growth data in the first quarter of this year will remain weak, but the unemployment rate will drop to 3.5% by the end of the year.
Moody’s analyst economist Ryan Sweet said: “Unfortunately, the economic development path is still affected by the epidemic, and Omicron will have a major impact on the economy in the first quarter.”
Sal Guatieri, senior economist at BMO Capital Markets, said that at the end of a glorious year, the US labor market may lose a bit of momentum, mainly due to a lack of available workers rather than jobs, but at least it has performed well so far. The non-agricultural sector in January will portray a weaker situation, and the remaining few months will see the latest trend of the epidemic.
Fed problem
Charlie Ripley, a strategist at Allianz Investment Management, said that the tight labor market will exacerbate the inflation problem. It would be surprising if the Federal Reserve did not consider exiting sooner at the January interest rate meeting.
Mary Daly, president of the Federal Reserve Bank of San Francisco, mentioned on Thursday: “If we (the Federal Reserve) take action too aggressively to offset the high inflation caused by the imbalance between supply and demand, we will not be able to solve the problem of the supply chain. Great effect, but we will definitely destroy the economy and reduce future employment opportunities.”
Dai Li further stated on Friday that she would like to see a gradual increase in interest rates and start to shrink the balance sheet earlier than last time. She did not support the first rate hike and began to shrink the balance sheet at the same time. After this time began to adjust the balance sheet.
Fed Chairman Bauer will go to the Senate Banking Committee next Tuesday (11th) to testify and provide interpretation of the data. Daco said: “The latest non-agricultural report can provide additional evidence for the Fed’s hawks. However, in the context of the worsening of the epidemic, the stagnation of economic activities in the first quarter will force Bauer to walk on a tightrope at the hearing, which is too hawks. Remarks may lead to uncontrolled tightening of financial conditions and have a negative impact on economic activity.”