The stock market's pullback lasted one day last week, ending after top Fed officials signaled the likelihood of a pause in rate hikes at the June 13-14 FOMC Meeting. A pause should bolster economic growth. At the same time, inflation may remain contained, as surprisingly softer data on the wage front were released last week. Slower wage inflation supports a Fed decision to pause and could help lift corporate earnings. In all, the latest macroeconomic developments should help sustain the stock market rally.
There were several "good" pieces of evidence regarding wage inflation last week. There was a large downward revision to Compensation Per Hour in a report the market typically ignores. Wage inflation in the May Employment Report eased back to a moderate trend despite a surge in jobs, and the high April wage print was revised down.
Major downward revisions to Compensation/Hour -- the broadest measure of labor costs -- significantly lowered upside risks to inflation (see table). Rather than showing an acceleration in the trend of labor cost inflation, as the prior preliminary data had shown, the revised data show a slowdown to a 3.0% or lower pace consistent with the Fed's 2% price inflation target -- taking account of an uptrend in productivity.
Compensation/Hour (percent change)
(q/q, annualized) (From a Year Ago)
Revised Prior Revised Prior
Q123 2.1 3.4 3.0 5.0
Q422 -0.7 4.9 3.0 4.5
The May Employment Report had a lot of favorable features for the Fed and stock market, besides a slowdown in wage inflation. Although Payrolls surged (which was the risk), other parts of the Report were benign. Despite the jump in jobs, Total Hours Worked (THW) dipped as the Average Workweek slipped. THW so far in Q223 are flat relative to the Q123 average, pointing to modest GDP growth this quarter. The Atlanta Fed model's latest estimate is 2.0%. When combined with the 1.3% GDP growth in Q123, economic growth may be below trend in H123. Indeed, the 0.3% point jump in the Unemployment Rate to 3.7% could be catch-up to this slow pace. It is clearly in the right direction for the Fed. Moreover, the 0.3% m/m increase in Average Hourly Earnings, after a downward-revised 0.4% in April (was 0.5%), equals the prior 3-month average and shows a further containment of labor cost inflation so far this quarter -- perhaps a result of the easing in labor market conditions. The annualized m/m increase is roughly in line with the 3.0% trend in Compensation/Hour.
There is a possibility of a slowdown in the May CPI, due June 13. It would require flattish Used Car Prices and Airfares, as well as declines in some areas. At this point, a 0.1-0.2% m/m Total CPI and 0.3-0.4% Core can't be ruled out. Both rose 0.4% in April.
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