By Stephen Culp

NEW YORK, (Reuters) – Twenty-months after a worldwide health crisis hampered the U.S. economic recovery, new data and a hawkish turn by the Federal Reserve suggest that the labor market may be on the verge of recovering from the pandemic.

The stock market could be affected by this recovery in contradictory ways. It could also mean that the labor shortage, which has caused high wages and reduced profit margins in the past, may be ending.

It could also help speed up the Fed’s timetable for raising the Fed funds target interest rate. This could prove to be beneficial for financials that are sensitive, but could cause problems for tech sectors, who have benefited from low interest rates.

Wall Street went wild this week when signs came in from the Fed that said it was considering pushing forward its monetary tightening plan.

Focus now shifts to Friday’s Jan payrolls report, which will be available at 8:30 AM EST (1330 GMT), and determine whether stocks are regaining their record-breaking rally last year or if they have pulled back on concerns about rate increases.

The Fed may soon reverse the COVID-era policy of monetary assistance after the economy suffered a massive collapse. Recent data suggests that this could happen sooner than anticipated.

The Institute for Supply Management’s PMI report this week indicated that there was continued expansion in employment. Meanwhile, the Labor Department’s JOLTS data revealed that job openings have declined from an all time high while hiring is on the rise. (Graphic: JOLTS, https://graphics.reuters.com/USA-STOCKS/myvmnboenpr/jolts.png)

Even more striking is the fact that ADP, a payroll processor, showed that private employers created 807,000 new jobs in August, which was twice what had been expected. (Graphic: ADP, https://graphics.reuters.com/USA-STOCKS/lgpdwjlaavo/adp.png)

The report on Thursday also showed that the unexpected spike in jobless claims last week brought them to the lower end if the labor market is healthy. Challenger Gray’s planned December layoffs increased 28.1% over the prior month. This is the lowest total annual figure ever recorded.

Thomas Simons, Jefferies economist wrote that the trend in jobless claims “predicts positively for December payrolls which are released tomorrow.” (Graphic: Jobless claims and Challenger layoffs, https://graphics.reuters.com/USA-STOCKS/gkplgbdaqvb/joblesschallenger.png)

The Fed’s timeline for rate increases is dependent on Friday’s December Employment Report. Economists polled at Reuters believe that this report will reveal a gain in nonfarm payrolls of 400,000, and a decrease in unemployment to 4.1%.

By November 2018, the U.S. economy was still reeling from 3.9 million of the 22.24 million job losses in March 2020 and April 2020.

The minutes of the U.S. Federal Reserve’s last policy meeting were released on Wednesday. They indicated that members had made a more hawkish move than people expected. It may signal that it might shorten its timelines to taper and reduce inflation-taming interest rates as conditions improve.

It appeared that investors might be seeing the Fed removing the punch bowl quicker than they had expected. The Dow fell nearly 2%, and Nasdaq was down about 3%

Investors and analysts agree that Friday’s most important indicators will be the labor force participation rate and wage growth. This is because employers are struggling to recruit and keep workers.

David Carter, Lenox Wealth Advisors’ chief investment officer in New York said that the participation rate was very important. It can have an impact on employment figures. Participation is a sign that you are not included in the data. From the Fed’s perspective it’s not so much low unemployment it’s getting more people working.” (Graphic: Labor market participation, https://graphics.reuters.com/USA-STOCKS/jnvwejxknvw/participation.png)

The report on Friday could indicate that the hourly earnings growth of U.S. firms is slowing down as they become less ambitious in trying to recruit and retain employees. That would bode well for profits margins.

Ellen Zentner is the chief U.S. economics officer. She stated, “From a larger perspective, strength of wages is driving a reverse in labor() share corporate income that has fallen sharply during the past twenty-two decades.” Morgan Stanley In a research note.

The Fed is closely monitoring the wider inflation picture and the year-on-year wage increase, which remained steady at 4.8% in November.

As illustrated by the graphic below, wages, along with other major indicators, continue to soar well above the Fed’s average annual 2% target rate, a state of affairs that has helped prompt the central bank’s increasing hawkishness: (Graphic: Inflation, https://graphics.reuters.com/USA-STOCKS/akvezemjdpr/inflation.png)

The volatility that comes with the release of the monthly unemployment report is often a result of market movements, though not always as anticipated.

In the last 12 months, the February print (reported on March 5) has been the most surprising. It was 340,000 higher than the consensus. The S&P 500 jumped 1.5% that day.

The biggest mistake was when April’s 269k job additions were below estimates by 709k. On May 7, the day of that report’s release, the S&P 500 counterintuitively rose 0.9%.