Business Corpus: Jobless Rate Sinks To 3.9% But Weak Wage Growth Saves Dow JonesThe economy added 164,000 jobs in April as the jobless rate fell to 3.9%, the lowest since 2000, but wage growth disappointed. The post Jobless Rate Sinks To 3.9% But Weak Wage Growth Saves Dow Jones appeared first on Investor's Business Daily.

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The economy added 164,000 jobs in April as the jobless rate fell to 3.9%, the lowest since 2000. Yet wage growth, the key number for stock market investors on edge about more Fed rate hikes, surprised on the downside, coming in at 2.6%.

The jobs and wage data slightly lowered odds of four Fed interest-rate hikes in 2018, which should be positive for the stock market. The data didn't initially provide much of a boost. The Dow Jones industrial average, S&P 500 index and Nasdaq composite opened moderately lower after the jobs data, but the major market indexes staged a midmorning rally, fueled by Apple (AAPL). The Nasdaq led the way into positive territory, soon followed by the Dow Jones and S&P 500.

Wall Street expected 191,000 new jobs, 4.0% unemployment and a 2.7% annual rise in average hourly wages. Yet the undershooting on two of three key jobs metrics may make the job market look less robust than it is.

First, job gains in the prior two months were revised up by a combined 30,000, leaving the 3-month average at a rock-solid 208,000.

Further, Jefferies economist Thomas Simons noted that wage growth is sometimes depressed in months that the Labor Department's survey of businesses doesn't include the 15th of the month, which occurred in April. If that's the case, wage growth could take a leap in May. However, March's wage gain was also revised down, from 2.7% to 2.6%.

Jim Baird, chief investment officer for Plante Moran Financial Advisors, noted that other gauges of wage growth have pointed to stronger gains. The Employment Cost Index released last week showed that private-sector wages and salaries grew 2.9% from a year ago in March.

Treasury Yields Fall, Narrow

After the jobs data, the 10-year Treasury yield eased to 2.935% while the 2-year yield, which more closely tracks Fed rate expectations, held around 2.49%. The narrow spread between long-term and short-term interest rates may reflect concerns that the Fed will hike rates too much in the near term as the economy gets a boost from tax-cut and spending stimulus, leading to an economic letdown.

The stakes have increased for each jobs report as inflation has picked up close to the Fed's target 2% and interest rates have hit multiyear highs. The combination of low and falling unemployment with accelerating wage gains would fit perfectly with the Phillips curve theory that has long guided Federal Reserve policy. For investors, the key point is that most Fed policymakers still seem confident that inflation pressures won't lag too far behind wage pressures, as businesses pass along a portion of their higher wage bills.

To some extent, it's already happening as the Fed's favored gauge of core inflation hit 1.9% in March. Meanwhile, Wall Street has bumped up odds for a fourth rate hike this year to about 40%. Still, the Fed signaled on Wednesday that it won't be overly concerned if inflation rises a bit above 2% for a few months.

Big Retailers Hike Wages

There's good reason to expect a further pickup in wage growth in coming months. A host of large companies including CVS Health (CVS), Starbucks (SBUX) and Target (TGT) have announced wage hikes rolling out this spring that may start to show up in Friday's report.

This year is beginning to look lot like 2016, when wage gains accelerated into summer after Walmart (WMT) hiked its base wage to $10 an hour. Then Target, Costco (COST) and others followed. Walmart's minimum wage hike to $11 an hour has contributed to the same kind of dynamic early this year. Target subsequently hiked its base pay to $12 an hour and CVS to $11 an hour.

And as those companies hike wages, their competitors are being pressured to do the same. In March, Kroger (KR), Dollar Tree (DLTR) and Ross Stores (ROST) all said they're raising wages for employees, and their stocks sold off amid worries about profit margins.

What's different from 2016 is that now the jobless rate is nearly a percentage point lower, meaning more competition for workers. On top of that, numerous companies announced wage hikes in the wake of tax reform.

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