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Dow Jumps More Than 600 Points After Jobs Report Shows Slowing Wage Gains -- WSJ

The Wall Street Journal · 01/06/2023 14:31

By Alexander Osipovich and Caitlin McCabe

The Dow Jones Industrial Average rallied more than 600 points on Friday after fresh data showed a slowdown in wage growth, an upbeat sign for the Federal Reserve's battle against inflation that could ease pressure for further interest-rate increases.

The Dow rose 660 points in afternoon trading, or 2%, while the broad-based S&P 500 gained 2.2%. The technology-heavy Nasdaq Composite advanced 2.5%.

The day's rally put all three major U.S. stock indexes on track to close the first week of 2023 in positive territory. The Dow and S&P 500 are up more than 1% for the week, while the Nasdaq is poised for a weekly gain of 0.9%.

The Labor Department's monthly jobs report showed that employers added 223,000 jobs in December, the smallest gain in two years but more than the 200,000 expected by economists. The ability of U.S. companies to keep hiring shows that the job market has held up even as the Fed's rate increases have sparked worries about a potential recession.

The report also showed wage growth continuing to cool. Average hourly earnings rose 0.3% in December from the previous month, down from a 0.4% increase in November. They were up 4.6% from the previous year, down from a revised 4.8% gain in November and well below a March peak.

"Investors are celebrating the fact that the average hourly earnings number was less than expected," says Michael Arone, chief investment strategist at State Street Global Advisors. "There was fear going in that wage inflation would remain hot."

The data reduced fears of a so-called wage-price spiral, in which employees demand pay hikes in response to climbing prices, and the influx of money into their pockets fuels further inflation. Such a scenario could have pressured the Fed to hike rates aggressively. The U.S. central bank is set to make it next policy decision at its Jan. 31-Feb. 1 meeting.

Some investors said Friday's jobs report suggested that the U.S. economy was on track for a soft landing, in which the Fed raises rates enough to bring down inflation but without triggering a painful downturn.

"There is a real possibility of a soft landing," said Thomas Hayes, chairman of Great Hill Capital.

Some signs still point to economic weakening. The Institute for Supply Management's closely watched barometer of business conditions at service-oriented companies, released Friday, fell to 49.6% in December from 56.5% in November -- the first time it had showed a contraction since early in the pandemic. Any reading under 50% indicates a contraction of activity.

In recent weeks, money managers had grown hopeful that inflation would slow quickly in the months ahead, possibly prompting the Fed to begin cutting rates later this year. But this week has reminded investors the path forward could be more complicated.

Minutes from the Fed's last policy meeting, released Wednesday, showed that officials expect to keep raising interest rates in case price pressures prove more persistent. Meanwhile, Friday's hiring data added to evidence that the U.S. labor market remains strong -- a situation that benefits workers but could add to inflationary pressures.

"The market is already pricing cuts in 2023, which we think is misplaced, " said Hani Redha, global multi-asset portfolio manager at PineBridge Investments, of interest rates. He noted that while data indicates that parts of the U.S. economy are clearly slowing, "there's no imminent sign of things falling off a cliff."

Mr. Redha said he will also be carefully watching corporate results during the fourth-quarter earnings season, which kicks off in earnest next week. "For us, the key is to be watching profitability and the reaction to that, and what companies do with their labor force," he said.

Friday's rally was broad-based, with all 11 sectors of the S&P 500 posting gains. Costco Wholesale was the best-performing stock in the index, advancing 6.6% after the bulk retailer reported strong holiday sales.

World Wrestling Entertainment surged 19% after its former chief executive Vince McMahon said he plans to return to the company and pursue a sale of the business. Bed Bath & Beyond continued its plunge, tumbling 21% on Friday, a day after warning that it might file for bankruptcy protection after a steep loss in the latest quarter.

Bond yields fell after Friday's jobs report. The yield on the benchmark 10-year Treasury note dropped to 3.567%, from 3.720% Thursday.

Overseas, the pan-continental Stoxx Europe 600 climbed 1.2%.

Asian indexes were mixed. Hong Kong's Hang Seng fell 0.3% on Friday, while in mainland China, the Shanghai Composite gained less than 0.1%. Japan's Nikkei 225 added 0.6%.

Write to Caitlin McCabe at caitlin.mccabe@wsj.com

(END) Dow Jones Newswires

January 06, 2023 14:31 ET (19:31 GMT)

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