Harvest Global Markets :

Strong employment growth currently serves no purpose for stock market bulls. A robust economy increases the likelihood of a recession as it makes the Fed less tolerant towards monetary policy leniency.

Friday’s payroll data for November appeared robust but awful for monetary policy. The fastest growth in average hourly wages was seen throughout the year. Many inferred that it was time to abandon expectations that the labor market would slow without assistance from an aggressive Fed. The report was tight, though. Many claimed that the figures on hourly wages might have been distorted by a decline in hours worked.

High pay growth is important because it keeps spending above trend, which helps keep inflation at bay; nevertheless, the soaring spending is not just due to increased pay. Many savings are still available to consumers. According to a survey, the stock of surplus savings (in comparison to pre-pandemic levels) is $1.3 trillion and based on the present trajectory, it would take 14 months to exhaust it. However, the Fed cannot withdraw savings from people’s bank accounts. Using the labor market as a lever to reduce consumption forces employees to draw on shrinking savings until spending decreases.

Yet, there is a high probability that the Fed rates will climb by 50bp this month rather than 75bp, and further rate hikes may even occur in 25bp steps. However, retaining optionality, not softening policy, is the focus of that decision.

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