Goldilocks, for the US labour market data. NFPs are at 390, at the upper end of consensus, but still at a much less extreme pace than the monthly average of the prior 6 months. Rate hikes, and tighter financial conditions working their magic towards the hoped-for “soft-landing”.
Average hourly earnings continues a strong year on year pace (5.2%)…
…but importantly the sequential month-on-month data is looking much more moderate, and much more sustainable.
We’ve had a few prints now in the 0.3% range, which means the dreaded wage-price inflation spiral continues to look unlikely.
That matters, because in the wage-price inflation spiral (this is the Larry Summers view) the Fed’s reaction function (how it changes the cash rate in response to the difference between inflation and target inflation) would be much more severe, and would mean a much tighter near term policy setting, one that would almost certainly push the economy towards a recession, and the stock market almost certainly lower.
So, good news, all in all.
The data is still strong enough, mind you, to ensure the Fed stays on the present path of tightening, which means we can expect a few back-to-back 50s, moderating to 25s by September, if not an outright pause, in which the Fed will see how the data evolves.
This baseline scenario continues to suggest that consumer discretionary, homebuilders, tech and secular growth stocks face headwinds, whilst the rate-sensitives (here, meaning those leveraged to higher rates) should continue to trade relatively well.
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