Premarket stocks: Jay Powell’s ’90s dream dashed

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The US economy added 263,000 jobs in November, 63,000 more than the consensus estimate. The bigger surprise was that average hourly earnings rose 0.55%, the fastest pace since January.

A strong job market is good news for U.S. workers, but equally worrisome for the Federal Reserve and stock market bulls. This shows that the Fed’s strategy of raising interest rates to curb inflation is not working, and more painful rate hikes are coming.

what happened: Executives often try to pass the cost of paying higher wages on to customers by raising prices for goods and services. When prices rise, workers often demand wage increases to keep up with the cost of living. If they did, the price would rise again to maintain corporate profits. This is the inflation-induced wage-price spiral that Fed officials are trying to avoid.

So the holy grail of economics is usually to keep wages rising but prices low.

“To be clear, strong wage growth is a good thing,” Federal Reserve Chairman Jerome Powell said Wednesday at the Brookings Institution. “But for wage growth to be sustainable, it needs to be consistent with 2% inflation.” Year-on-year wage growth rose to 5.1% in November, more than double the target.

Returning to sustainable levels of wage growth and containing inflation will require reducing demand for labor. But with 1.7 job openings per job seeker in October, the labor force participation rate fell, keeping competition for workers and wages high.

The dream is over: Over the past year, Powell has floated an optimistic idea that wage growth could be lowered without sending the slowdown into recession. An end to the pandemic would bring workers back into the labor force from the sidelines, reducing labor imbalances and easing inflationary pressures, he said.

The idea is straight out of the central bank’s playbook in 1994, when the Fed last tamed inflation and managed a soft landing.

But employment today is different than it was then. The baby boomers were at the peak of their careers in the 1990s, and immigration was high. All of this has led to a surge in the labor force, keeping unemployment low even as interest rates rise.

Last week’s jobs report showed that Americans were not returning to the labor market.

Powell seemed to finally acknowledge this in a speech last week, citing disproportionate numbers of people retiring permanently as baby boomers leave the workforce and the effects of long-term Covid. Slowing growth in the working-age population, a sharp drop in immigration and a surge in deaths during the pandemic are also long-term damages from labor supply imbalances, he said.

In short, workers are in high demand because there are fewer and fewer workers to move around.

Powell also seemed to concede that his dreams of a sudden surge in the labor supply have been dashed, and that the path to lower interest rates while avoiding widespread job losses has narrowed considerably.

“Despite some promising developments, we are still a long way from restoring price stability,” he said.

Goldman’s revenue has increased this year, but the investment bank’s traders and salespeople will compete for a bonus pool that is at least 10% lower than last year, according to Bloomberg.

Goldman Sachs has begun notifying executives that it expects a “double-digit percentage reduction” in numbers, the report said.

Investment bank Jefferies also warned employees this week that 2022 will be a “difficult pay season.”

The recent spate of downbeat warnings is part of a larger trend on Wall Street.

Overall, bankers who help integrate companies could see their bonuses drop by about 20% this year, while those who help companies raise new capital could see their salaries drop by 45%, according to a recent report from compensation consultancy Johnson Associates.

“It’s been an exceptionally bad year,” said Alan Johnson, managing director of Johnson Associates. “I think there will be a lot of unhappy people. Some will look for other jobs … but there will also be layoffs.”

big picture: No one cries for bankers who make about $200,000 early in their careers. But even if you don’t work in finance, you should be concerned, Johnson said. Year-end spending is falling sharply as mergers and acquisitions dry up, inflation persists and the threat of recession grows.

“It’s the canary in the coal mine for the economy. If the canary dies, it doesn’t do anybody any good,” Johnson said.

Global M&A deals totaled $642 billion in the third quarter, according to Refinitiv data. That was down 42% from the previous quarter and the lowest sales for the same period in a decade.

A closely watched survey by the National Association for Business Economics found that a majority of its panel of economists sees a greater than 50% chance that the U.S. will experience a recession in 2023, most likely in the first quarter of this year.

“NABE survey participants continued to downgrade their expectations for the U.S. economy, forecasting slower growth, higher inflation and a weaker labor market,” said NABE President Julia Coronado.

So what will get us there? More than two-thirds of the participants said they believed the biggest factor contributing to the dimming economic outlook was the Federal Reserve’s policy of raising interest rates. Nearly 70% see “too tight monetary policy” as the biggest downside risk.

More haze: Fewer than a quarter of panelists in the pessimistic survey gave the economy more than a 50-50 chance of avoiding a “severe recession,” and none of those respondents put the chance of a soft landing above 75 percent.

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