Market Week in Review

U.S. wage growth surges—Is a more hawkish Fed next?

On the latest edition of Market Week in Review, Consulting Director Sophie Antal Gilbert and Senior Investment Strategist Paul Eitelman discussed the highlights from the U.S. employment report for January, in addition to the recent decline in equity markets and the latest GDP number for the Eurozone.

Wage growth picks up steam in latest U.S. employment report

The U.S. economy added 200,000 jobs in January, according to recently-released data from the Labor Department—an above-consensus number that is further evidence of the strong state of the nation’s labor market, Eitelman said. Even more encouraging, in his opinion, was the marked increase in wage growth—with average hourly earnings jumping 2.9% year-over-year. “The U.S. has been in this puzzling period of an incredibly healthy job market accompanied by subdued inflation,” he explained—“and the positive news around wage gains is a bit more evidence that inflation is trending upward.” He added that the rise in average hourly earnings was the country’s largest since 2009.

So, what might this mean for future U.S. Federal Reserve (the Fed) interest rate hikes the rest of the year? “We expect that this will keep pressure on the Fed to continue with its rate hike process in 2018,” Eitelman said, noting that the central bank already signaled as much in a meeting earlier this week. “The Fed inserted one new word in its post-meeting statement,” he explained—“switching from talking about gradual rate increases going forward to further gradual rate increases going forward.” While this was a minor change, Eitelman and the team of Russell Investments strategists believe it shows that the Fed now has a little more conviction in its plans to continue raising interest rates.

Volatile week for global equity markets

Switching to equities, Eitelman said that the week of Jan. 29 was a choppy one for markets, with the S&P 500® Index down roughly 1.8% on the morning of Feb. 2, relative to the previous Friday. What could be behind this? “It’s most likely sovereign bond yields—especially in the U.S,” Eitelman said. As evidence, he pointed to the recent spike in U.S. 10-year Treasury yields, which topped 2.8% at midday on Feb. 2. “This is the highest yields on the 10-year note have been since early 2014—and it’s creating jitteriness in markets,” he said. However, Eitelman stressed that while the drop in equities may feel like a lot—especially given recent low volatility levels—it’s important to realize that it’s a decrease from record high levels. “Overall, global equities still remain very strong,” he concluded.

Solid overall growth in Europe, but inflation remains weak

Transiting to Europe, Eitelman said the region’s growth numbers continue to look very strong, with the Eurozone logging a 2.7% GDP (gross domestic product) growth rate, year-over-year, during the fourth quarter of 2017. “Broadly speaking, the economic and earnings growth data continues to be encouraging,” he said.

One thing that has not been improving, however, Eitelman remarked, is inflation—which came in at just 1.3% across the Eurozone during January, according to data from Eurostat. “This is likely due to the fact that Europe is a little bit further behind the U.S. in its economic cycle,” he explained, adding that the upshot to this is that it creates a nice environment for equity markets—as there isn’t much pressure on the European Central Bank (ECB) to embark on a more aggressive monetary tightening policy.

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