Stocks Rally On Huge Job Gains; Acceleration In Wage Growth Puts Fed Betwixt And Between

The U.S. economy added 312,000 jobs in December, the Labor Department reported this morning. The government statisticians also revised November’s report to show the addition of 176,000 jobs instead of the prior report of 155,000. Economists surveyed by had expected the economy to add 180,000 jobs in December.

U.S. stocks are off to the races on those numbers. As of 11:50 a.m. New York time the Standard & Poor’s 500 stock index is up 2.86% and the Dow Jones Industrial Average is ahead 2.72%. The NASDAQ Composite has gained 3.65% and the small cap Russell 2000 has climbed 3.08%.

The Financial Select Sector SPDR ETF (XLF) is up 2.77% and the Technology Select Sector SPDR ETF (XLK) has climbed 3.89%. The iShares MSCI Emerging Markets ETF (EEM) is ahead 3.19%.

The CBOE S&P 500 Volatility Index (VIX) has dropped 11.24% to 22.59 on market optimism.

I’m of the opinion that further reflection will convince the market that not all the numbers in this morning’s report were good news.

If you’ll remember, yesterday that Fed Funds Futures market reflected Wall Street’s belief that the Federal Reserve would not increase interest rates in 2019 at all. Not even once. And that the Fed’s next move would be a rate cut in 2020.

Although the strength of the economy is a huge relief, reflected in today’s bounce, since it pushes back at market worries about economic growth and a possible recession, wage growth was so strong in today’s report that it definitely puts an interest rate increase or two for 2019 back on the table at the Fed. December average hourly earnings were up 0.4% (economists had expected a 0.3% increase.) That pushed the 12-month increase in average hourly earnings to 3.2%, up from a 3.1% rate in November.

One of the worries that has kept the Fed eyeing interest rate increases has been wage inflation and today’s numbers pour a little bit of fuel on that fire.

The CME FedWatch tool, which calculates the odds of a Fed move from prices in the Fed Funds Futures market, is still putting the chance of an interest rate increase at 0% for the Fed’s March, May, and June meetings. Watch for even incremental changes in those odds. The yield on the 10-year U.S. Treasury is up 9 basis points today to 2.65%.