Why investors fear a rise in hourly pay

Tariff worries could soon give way to fresh fears about rising wages. The pace of worker pay gains will again top the list of things Wall Street will be watching when the February jobs report is released early Friday.

In the January employment report, a

2.9% year-over-year gain in average hourly earnings — the fastest pace since

2009 — sparked a sell-off in stock and bond markets amid worries that wage inflation was picking up enough to cause the Federal Reserve to ramp up its interest rate hike plans. In December, the Fed signaled its plans to hike rates three times in 2018, but investors now fear a fourth quarter-point hike.

Wall Street wants to know if hourly pay moderated or whether wage pressures continue to build. “Wage growth,” says Bankrate.com senior economic analyst Mark Hamrick, “is the most important aspect of tomorrow’s jobs report.” The second most important number investors will be watching is the unemployment rate, currently at 4.1%. A dip to 4% will create more upward pressure on wages.

Markets likely will react badly to a further rise in wage growth, especially if pay gains reach 3%, according to Jim Paulsen, chief investment strategist at The Leuthold Group. A more marketfriendly annual pace of hourly pay growth would be 2.8% or 2.7%, he adds.

A stronger-than-expected rise in wages Friday could push the 10-year Treasury above 3%, a level that could spook investors. “Three percent wage inflation and 3% on the 10-year would be a bad combo for stocks,” says Paulsen.