Both stock and bond markets rallied to start 2023 as investors look forward to the end of the most aggressive FOMC tightening in over 40 years amidst renewed optimism that meaningful inflation reduction can occur without triggering a harder, economic landing later this year. Indeed, today’s Non-Farm Payroll data release for December revealed another month of robust job creation and, more importantly, some welcome moderation in the pace of wage growth, surely good news for the FOMC as compensation pressures, particularly in the service sector, are seen as the main impediment to getting core inflation on a sustainable path towards the Federal Reserve’s 2% target. Indeed, average hourly earnings growth slowed to 4.6% for 2022, the smallest year-over-year gain since August of 2021, which has given some investors hope that the economy can continue to add jobs without also adding to wage pressures, a trend that, if sustained, may expand the path towards the often illusory economic ‘soft landing.’ Additionally, today’s ISM Services data revealed cooling demand and more moderation in prices, more key data points for Powell and Company that may hasten the end of the latest monetary policy tightening cycle by the end of the first quarter. Of course, these are two data points in a sea of otherwise mixed numbers that will need to be confirmed for trend in the months to follow, with plenty of risk to upside inflation surprises as we move into 2023.
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