Bonds, Stocks Slammed As Hot Wages, Unemployment Data Sparks Surge In Rate-Hike Odds

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by Tyler Durden
Friday, Jan 07, 2022 - 09:06 AM

A hotter than expected wage growth print and tumbling unemployment rate have been greeted by selling in bonds and stocks as no obvious 'dovish' excuse can be gleaned from the data.

Academy Securities' Peter Tchir's instant reaction clarifies much and the headline is simple - this is not great for markets...

The total number of +340k (including revisions) is a miss, but not as bad as the headline number of 199k suggests. The revision fits nicely given that last month was apparently a big miss (which, after revisions, will turn out not to have been the case).

The Household survey, which drives unemployment, was decent again (though I loved that they had to caveat that due to Omicron more interviews were conducted by phone, than in person, because it is such a funny reminder that we still have people paid to knock on doors t determine how many people have jobs in America - just think about that for a minute).

The "scariest" thing for markets is that hourly earnings were 0.4% higher in November (up from original estimate of 0.3%) and were 0.6% higher in December. The "old" Fed, whether Yellen, or Bernanke, would often discuss inflation as transitory, unless there was wage inflation. Wage inflation is here.

The politicians will get themselves contorted, trying to say how great it is that people are earning more, while bashing inflation, but that is the soundbite world we live in.

The unemployment rate of 3.9% isn't as "good" as it seems, at least not from the Fed's perspective. We have not seen a pick up in labor force participation rate, which would be nice to see, and on my first glance at the data, minority unemployment rates didn't benefit as much, and that is a measure the Fed is watching closely.

Bottom Line: No reason to expect dovish talk on the back of this and no evidence of a significant end of year slow down (though I still expect Jan/Feb data to dip)

Bloomberg's Riccadonna adds that the biggest news from this report, without doubt, is the fact that the labor market has now arrived at (and surpassed) the Federal Reserve’s estimate of full employment (which the Fed pegs at 4.0%).

“As we are already beyond that level (3.9% reported), this will compel any lingering fence sitters on the FOMC to the view that the threshold for interest rate liftoff has been met -- thereby titling policy makers’ inclination toward March vs. June liftoff.”

As Renaissance Macro's Neil Dutta also confirms:

This is a green light for March. The U3 unemployment rate plunged 0.3ppt to 3.9%, 0.4ppt below the Fed’s Q4 2021 estimate and only 0.4ppt above the Fed’s estimate for year end 2022."

And that is now priced in with the odds of a March hike now above 90%...

Treasuries were dumped with the short-end surging most...

Stocks tanked on the print...

So, we are back at the "good news is bad news" period of the monetary/market panic-cycle.

And perhaps that is why the yield curve is flattening (policy-error anticipating)...

So, given that the impact of Omicron is yet to really hit the jobs data, will we see The Fed hiking rates right as payrolls print negative?