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Spokane, Washington  Est. May 19, 1883

Stocks rally with Treasuries as wage growth slows

A person looks at stock prices displayed inside the trading gallery of the RHB Investment Bank headquarters in Kuala Lumpur, Malaysia, on Oct. 11.  (Samsul Said/Bloomberg)
By Emily Graffeo Bloomberg

U.S. stocks had their best day in more than a month as traders speculated that a slowdown in wage growth will keep the Federal Reserve from having to intensify its battle against inflation.

Treasuries rallied and the dollar dropped.

The S&P 500 jumped more than 2% to salvage the first weekly advance in the past five, while the Nasdaq 100 rose 0.9% in the four days.

The dollar suffered its longest streak of weekly losses in two months as cooler wage growth outweighed an otherwise solid jobs report to fuel expectations that the Fed will slow its pace of rate hikes.

Treasuries advanced Friday, with sharp declines in short-term yields where the policy-sensitive, two-year rate fell the most this week since November.

The eagerly anticipated December jobs report failed to offer a clear picture of the state of the American labor market, especially since it came a day after two jobs readings signaled continued tightness.

Hiring exceeded estimates for the month and unemployment fell to the lowest in decades.

Traders continued to mull how that strength contrasts with the weaker gains in hourly wages and what that means for Fed policy ahead.

A reading on consumer prices is due next week.

“A new 53-year low in the unemployment rate is a real problem, suggesting the Fed made zero progress toward relieving labor market strain in 2022,” wrote Chris Low, chief economist at FHN Financial.

“But the combination of the downward revision to November average hourly earnings and a lower-than-expected December rise buys the FOMC more time.”

Recent data only complicates the central bank’s task and creates uncertainty for traders.

The Kansas City Fed’s Esther George warned Friday that officials will have a tough road ahead as they attempt to balance inflation and employment.

Other Fed officials have also continued to be hawkish, saying that while data has been encouraging and inflation is easing, the central bank still has more work to do.

Swaps contracts show investors now expect the policy rate to peak at under 5% this cycle, down from 5.06% just before Friday’s jobs report.

While traders remain divided about the size of February’s hike, with 33 basis points of tightening priced in, it appears that a quarter-point move is seen as more likely than a half-point increase.

Traders are now awaiting December’s inflation reading that releases next week for further clues about the economy.