Tight Labor Market, Soft Wages: What It Means for the Fed

Tight Labor Market, Soft Wages: What It Means for the Fed

Stocks were mixed but broadly higher last week, with the S&P 500 up 0.13% to 7,719, the Nasdaq Composite up 0.42% to 26,507, and the Russell 2000 up 0.15%, while the Dow slipped 0.16% to 53,414. Year-to-date, the S&P 500 is up 13.65%, the Nasdaq 14.51%, and the Russell 2000 20.83%.

Jobs Hold, Wages Slow

August’s jobs report showed the labor market holding at a headline unemployment rate of 4.1%, with non-farm payrolls rising to 162,000. On the surface, that looks like a tight labor market by historical standards, lower than 88% of readings over the past 50 years. Yet wage growth tells a different story: average hourly earnings rose just 3.1% over the past year, the slowest pace in more than five years.

Worker Confidence Is Slipping

That divergence shows up clearly in how workers themselves describe the job market. The spread between consumers calling jobs “hard to get” versus “plentiful” has historically tracked closely with the unemployment rate, but today perceptions of job availability look considerably weaker than the headline rate would suggest, hinting that workers have less leverage to negotiate higher pay even as headline unemployment stays low.

Fed Likely Stays Put

For investors, subdued wage growth is a signal that the labor market isn’t generating meaningful inflationary pressure on its own. Unless this week’s CPI and PPI readings deliver a significant upside surprise, we expect the Fed to remain on hold at its September meeting.

Yields Stay Elevated

Treasury yields stayed elevated against this backdrop, with the 10-year yield at 4.78% and the 30-year at 5.24%, both near their highest levels in years. Sector performance tilted toward energy and technology on the week, while more defensive and rate-sensitive areas lagged; energy remains the standout for the year, up 44.5%, with technology also strong at 23.9%, while consumer discretionary is the lone sector in negative territory year-to-date.

Global Markets Join Rally

Internationally, developed markets (MSCI EAFE) are up 14.52% year-to-date and emerging markets (MSCI EM) up 24.88%, both continuing to participate in this year’s broad-based rally alongside U.S. equities.

Looking Ahead

Looking ahead, this week’s CPI and PPI reports, along with consumer sentiment data, will be the key inputs shaping whether the Fed’s current wait-and-see posture holds into the fall.

As Always

I’d like to leave you with the final line we’ve used since we started these commentaries back at the very height of market volatility in March 2020. Always remember that we create financial/investment plans not for the easy times, but to prepare for the tough ones.