Don’t be fooled by the weak job growth or higher-than-expected unemployment in March. Better wage growth and less labor-market slack mean the stock market won’t get much of a reprieve from Fed rate-hike fears.


The good news: The surprisingly weak 103,000 job gain throws a bit of cold water on the notion that the economy is overheating. Yet a hawkish shift by the data-dependent Federal Reserve will continue to remain a risk for investors with every wage and inflation report. The consumer price index coming out on Wednesday is the next one to watch. UniCredit Research expects the core CPI, excluding food and energy, to rise 2% from a year ago vs. 1.8% in February.

Following the report, Dow Jones industrial average, S&P 500 index and Nasdaq composite initially moved higher, then relapsed in late morning trade on the stock market today. The Dow Jones, S&P 500 and Nasdaq composite were all down 1% or more.

Before the report, stock market futures were deep in the red in reaction to President Trump’s threat to strike back at China even harder, with tariffs on an additional $100 billion in imports.

The 10-year Treasury yield slipped about 5 basis points to 2.78% as stocks fell and the jobs and unemployment data surprised on the soft side. Odds of four Federal Reserve rate hikes this year, one more than expected, eased to about 26% after the report, according to CME Group’s FedWatch tool.

Average hourly wages rose 8 cents to $26.82 an hour, lifting the annual gain to 2.7%, in line with expectations.

Wall Street economists expected a 175,000 job gain, 4.0% unemployment and 2.7% average wage growth.

Still, job growth has averaged a solid 202,000 the past three months, including revisions. A balmy February likely shifted some seasonal job employment forward, depressing March job creation.

Harm Bandholz, chief U.S. economist at UniCredit, pointed out that jobless rate actually did decline in March — if you don’t round to the tenths — from 4.14% to 4.07%. Over the past 12 months, the labor force has increased by 125,000 per month, on average, well below the pace of job creation. “Looking forward, we continue to expect the jobless rate to fall towards 3.5% by the end of the year.”

Employers also have been increasing work hours, further evidence of less slack. On a weekly basis, the average wage rose 3.3% from a year ago in March, the best gain in seven years.

Investors should expect the improvement in hourly wage growth to be the start of a trend for two reasons.

First, dozens of major employers announced wage hikes over the past few months, but few came early enough to show up in February’s jobs report. Walmart (WMT) and CVS Health (CVS) hiked their minimum wages to $11 an hour. Six months after raising its minimum wage to $11, Target (TGT) said last month that it will pay all current associates at least $12 an hour starting this spring.

Second, wage growth receded in the spring of 2017, rising just 2.2% at an annual rate from March through June. As those months that saw depressed pay gains drop off, replaced by months with firmer growth this year, the annual rate will trend higher.

Walmart Wage Growth Contagious

Take a closer look at Walmart’s wage changes. Before its pay hike announced in January 2018, Walmart hadn’t raised its base wage in nearly three years. That’s a big deal. When Walmart hiked its minimum wage for all current associates to $10 an hour in February 2016, that wage hike was contagious.

Walmart is big enough to put upward pressure on wages for other employers. Target and Costco (COST) were among those who quickly hiked pay shortly after that 2016 move. Average hourly earnings growth rose to 2.8% that July before momentum flagged.

Walmart’s 2016 wage hike came when the jobless rate was nearly 5%. Now it’s around 4%, so competition for workers has intensified. At least for workers on the lower end of the wage spectrum, pay hikes appear to be broad-based. Starbucks (SBUX), Kroger (KR), Dollar Tree (DLTR) and Ross Stores (ROST) all have said they’re raising pay. Meanwhile, dozens of banks, including Bank of America (BAC) and Wells Fargo (WFC) hiked their minimum wage to $15 an hour for tellers.

Fed Rate Hike Implications

As wage gains accelerate and the jobless rate moves below 4% in coming months, Fed policymakers may lean toward four interest-rate hikes in 2018, not just three. Fed models assume that inflation will follow wage growth higher. There’s reason to be skeptical. For example, Kroger said last month that it will use the bulk of its tax cut to offset the cost of higher wages and lower prices. The competitive environment facing Kroger from Walmart and Amazon (AMZN) via its Whole Foods division offers at least some reason to doubt whether wage pressure will feed through to higher prices.


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