Employment Report Won’t Stop December Rate Hike

After an almost 800-point drop on Tuesday, the markets were given a reprieve in honor of former President G.H.W. Bush. They resumed their freefall early on Thursday before buyers came off the sidelines to pick up some bargains and drive a late rally. Traders were actually looking for a less-than-stellar employment report this morning in the hopes that it might make the Fed more reticent about raising rates again at the December meeting a week before Christmas.

Sadly for Wall Street, the numbers this morning were just the continuation in the string of good jobs reports we have had for months now. It may not have met the consensus of 190,000 new jobs created, but the actual number of 155,000 is not that big a miss. More concerning for the stock market was the fact that wage growth was showing no sign of easing. Average hourly earnings growth remained steady, rising by 6 cents, and year-over-year wage growth is now up 3.1%. With inflation running around 2.5% over the same period, that means real wage growth for the year is 0.6%. Horrors! Wage earners gaining slightly more buying power!

Of course, inflation adjusted wage growth has actually been declining over the last few years as inflation has slowly increased. However, that 3.1% wage growth number makes it more likely that the Fed will ignore the talk of downturn and recession and go ahead with the expected rate hike. The market is reacting accordingly, down around 600 points at 3pm.

There are two drivers for this stock market collapse. First, rising interest rates are driving the normal process of moving money out of the market and into bonds with guaranteed rates of return. This may be enhanced by the incompetence of the Trump administration and the lack of faith it can take the appropriate steps to manage economic trouble. Rising interest rates also raise companies’ cost of doing business, putting a squeeze on those firms running tight profit margins.

Secondly, slowing global growth combined with Trump’s trade wars are dampening the prospects for economic growth in the next couple of years. Worse, the growing federal budget deficit created by the Trump tax cuts will restrict the ability to use fiscal stimulus if such a downturn occurs. With interest rates already low, any boost the Fed could provide will be limited, just as it was when we hit the zero bound in the wake of the Great Recession, meaning any recovery will take longer to take hold.

It’s pretty clear that the market will soon be in correction territory and perhaps then it will find a new floor and stabilize. Until then, it’s just a wild ride down.